2019 ANNUAL REPORT
Clayborne, Alexandria
Assembly at Germantown
Riverside, Alexandria
Assembly at Herndon
In 2019, we demonstrated
our ability to successfully
execute large, transformative
transactions. 2020 brings higher
ambitions and new priorities
as we navigate a global health
crisis with far-reaching human
and economic implications.
There is no doubt that we are in uncharted waters. Our
day-to-day lives have drastically changed. Despite the
incredible courage shown by our healthcare providers,
the health and well-being of our community continues
to be at risk. We remain hopeful for swift progress in
confronting this threat and we have confidence in the
power of the many dedicated individuals and institutions
who are relentlessly pursuing solutions.
Our top priority has always been—and continues to
be—the safety of our residents, tenants, partners, service
providers, employees, and each of their families. Beyond
the safety measures that we have put in place, we are
focused on performing to the highest standards during
these challenging times. The past several years have
been dedicated to developing the tools and resources to
allow us to perform nearly all of our corporate functions
from remote locations—in preparation for situations
like we find ourselves in now. Our teams have risen to
the challenge, working and collaborating from across
the region to keep the business running smoothly and
efficiently.
While the global nature of the pandemic has undoubtedly
caused economic weakness, we are certain of the strength
of our organization and confident in our ability to support
our stakeholders, preserve our operational flexibility, and
Paul T. McDermott
continue to deliver long-term value creation. We remain
committed to our long-term investment strategy, which
drove actions that significantly de-risked our company in
2019.
2019 was an extraordinary year for WashREIT. We
executed $1.3 billion of strategic transactions—a company
record—to streamline and de-risk our portfolio and
improve our ability to deliver long-term value creation.
Alongside our strategic capital allocation, we signed
1.1 million square feet of commercial leases—a four-
year record—and delivered strong performance from
our multifamily portfolio with NOI growth of 4.6%. Our
strategic capital allocation, leasing momentum, and
multifamily performance helped drive a total shareholder
return of 32.4% in 2019, outperforming each of the MSCI
US REIT and S&P 500 indexes total shareholder returns of
31.5% and 25.8%, respectively.
Over the past six years we’ve executed $3.6 billion of
transactions to recycle capital into assets with stronger
longer-term risk adjusted growth potential. The majority
of our strategic capital allocation has been focused on
investing in high-quality, value-oriented multifamily
assets with renovation potential and selling high-risk
commercial assets. In 2019, we accelerated our plan to
overweight multifamily and that segment is now our
largest asset class.
Our shift to value-oriented multifamily is based on our
research-driven approach to long-term capital allocation.
Affordability continues to be the greatest challenge for
the DC Metro multifamily market. Although our region has
been adding record levels of Class A multifamily supply,
there continues to be a shortage of well-located, value-
oriented Class B rental housing. Due to the high costs of
construction, land, and labor it is increasingly difficult
for new deliveries to be affordably priced for mid-market
renter income segments. While these segments comprise
25% of regional rental demand, less than 5% of new
construction built over the past seven years is affordable
for these renters.
WashREIT has focused on investing in assets that offer
value-add potential in submarkets where there is a
wider than average differential in rent, or “affordability
MULTIFAMILY
THE ASSEMBLY PORTFOLIO
seven garden
In June 2019, WashREIT acquired the Assembly
Portfolio,
style apartment
communities consisting of 2,113 units, for $461
million. The Assembly acquisition aligns with
our strategy to capitalize on macro demographic
and housing affordability trends in the DC Metro
region and provides the opportunity to drive
value-creation through unit renovations and
improved property management. The addition
of these communities to the WashREIT portfolio
expands the geographic footprint of our value-
oriented multifamily investment strategy to high-
quality suburban markets within the Washington
Metro area.
Five assets, comprising 1,685 units, or 80% of
the portfolio, are located in Northern Virginia,
which drove 80% of regional job growth in 2019
and is increasingly becoming the job engine of
the region. Two assets, comprising 428 units, are
located in highly accessible neighborhoods in
Montgomery County, Maryland. Each property
offers proximity to major regional highways and is
within 30 minutes commuting distance to major
employment centers where job concentrations
range from 300,000 to 1.3 million jobs per center.
MULTIFAMILY
THE CASCADE AT LANDMARK
In July 2019, WashREIT acquired Cascade at
Landmark Apartments, a 277-unit, high-rise, Class
B apartment community located in the Landmark
area of Alexandria, for $70 million. The acquisition
of Cascade exemplifies WashREIT’s value-oriented
multifamily investment strategy of acquiring well-
located urban infill assets that offer a compelling
value proposition compared to nearby Class A
alternatives with the potential to drive asset-
level returns with unit renovations. Cascade is a
10-minute drive from Amazon HQ2, a 15-minute
drive from Washington, DC via I-395, and is in close
proximity to other major employers including
the Department of Defense’s Mark Center, Inova
Alexandria Hospital and the Pentagon.
gap” between housing options that are affordable for
mid-market renter income segments (Class B) and new
apartment supply (Class A). The value-add component
of our strategy allows us to invest in unit renovations that
provide an improved living experience for our residents
and generate strong returns for our shareholders—while
offering rents that are at an attractive discount to Class A
product.
Prior to 2019, we were predominantly focused on
multifamily urban infill locations. However, close
monitoring of trends led us to expand our strategy to the
suburbs. More than 70% of regional household growth is
projected to occur in the suburbs over the next five years,
driven largely by aging millennials looking for more space
and better schools near major employment centers.
Given the high cost of home ownership, as the wave of
millennials age into their late thirties and early forties,
they will continue to rent at rates greater than that of
previous generations—driving up this age group’s share
of new renter households from 30% to nearly 70% over
the next five years, according to the National Multifamily
Housing Council.
MULTIFAMILY UNIT RENOVATION
THE WELLINGTON
Our 2019 acquisitions of the Assembly Portfolio for
$461 million and Cascade at Landmark for $70 million
fit squarely into our broader strategy of targeting mid-
market renter households. These acquisitions enable
us to capitalize on the demand-supply imbalance that
exists for affordable housing in the DC Metro region while
driving asset level returns through unit renovations and
improved property management. Our 2019 multifamily
acquisitions doubled our pipeline for unit renovations,
which generated an average return on investment of 14%
in 2019. With our newly expanded renovation pipeline, we
are positioned for multiple years of value-creation.
On the development front, we are pleased to report that
we began leasing-up our first WashREIT-led, ground-up
multifamily development in early 2020. The Trove consists
of 401 units constructed onsite at The Wellington, a 711
unit value-add multifamily asset acquired in July 2015.
Located at the eastern end of Columbia Pike in South
Arlington, the Trove offers the opportunity to grow density
in a submarket with limited new supply. Following the
delivery of the second phase of the Trove, we are planning
the ground-up development of 767 additional units onsite
at Riverside Apartments in Alexandria, VA. Riverside is a
1,222 unit high-rise apartment community that presents
a rare opportunity for residential development proximate
to some of the region’s largest employers. We look
forward to providing additional details on the Riverside
development as plans progress.
The commercial assets that we sold in 2019 demonstrate
the continued execution of our plan to eliminate major
risks to cashflow stability within our portfolio. We sold
eight of our retail assets, including our riskiest power
center assets, reducing our retail lease expirations by
over 90% and our overall lease expirations by over 40%.
Additionally, we sold Quantico Corporate Center in
Stafford, VA and 1776 G Street in Washington, DC and
entered into an agreement to sell our remaining single
tenant asset, John Marshall II in Tysons Corner, VA, in
2020.
As we foreshadowed in late 2018, 2019 looked to be a
challenging year for our commercial portfolio due to
several large commercial lease expirations. Thanks to the
efforts of our leasing team, we signed 1.1 million square
feet of commercial leases in 2019, including a 51,000
square foot lease for the top two floors of Watergate 600
with a leading global energy and infrastructure capital
provider for a term of over 17 years. Our lease execution
and commercial asset sales addressed not only the
significant vacancies that occurred in 2019, but also 70%
of our original 2020 expirations by December 31, 2019.
Approximately 60% of our office portfolio is located in
Northern Virginia, which in 2019 posted its largest positive
net absorption since 2006. Tech and cybersecurity
demand drove 60% of our Northern Virginia leasing
volume in 2019.
Despite the complexity of our 2019 strategic capital
allocation, we maintained our targeted balance sheet
liquidity and flexibility throughout the year. We ended
2019 with a net debt to EBTIDA of 5.6x. Since year-end, we
paid off our final mortgage and eliminated our secured
debt, which further stabilizes our financial position.
In closing, we created a solid foundation for growth in
2019. We significantly de-risked our commercial portfolio
and signed long-term leases with high quality tenants.
We invested in value-oriented multifamily assets that
are positioned to capitalize on the supply-demand
imbalance for affordable rental options. With a five-year
unit renovation pipeline of over 3,000 units and near and
long-term development opportunities, we are positioned
for multiple years of value creation within our multifamily
portfolio.
While we undoubtedly face an operating environment
with a high degree of uncertainty in 2020, we remain
confident in our ability to maintain business continuity
and to create long-term value for our shareholders.
OFFICE
SPACE+
SPRING VALLEY VILLAGE
2020 PRIORITY
CREATING VALUE THROUGH ESG
While 2019 was a year of transformation for the
company, it was also a year of impact for our
Sustainability program. Through DC’s Community
Solar program, we installed solar panels on the
rooftop of our corporate headquarters at 1775
I Street, NW that benefit low income families at
Jubilee Housing in DC. The electricity generated by
the system is credited to local families, cutting their
annual energy expenses in half. We also developed
a hands-on partnership with Jubilee, raising $62,000
and dedicating over 1,000 hours to renovate the
grounds and youth center at Jubilee’s campus of
deeply affordable housing.
At the iconic Army Navy Building, we’ve focused
on unique ways to better connect and contribute
to the local ecosystem through the installation of
a 700 square foot rooftop garden, beehives, and a
building-wide composting program. The rooftop
beehive pollinates the garden, which grows produce
used in the Army Navy Club’s restaurant, while food
waste is composted off-site and returned as fertilizer
to the garden. With this project, we’re proud of
transforming unused space into a source of hyper-
local and organic food.
For these and other efforts, WashREIT was recognized
as a leader in sustainability in Washington, DC, being
awarded the 2019 District Sustainability Award. We
are committed to continuously improving our ESG
program—we’ve set ambitious 2025 targets and
look forward to updating you in our 2019-2020 ESG
Report.
We are committed to protecting and supporting
our residents, tenants and employees, and we are
partnering with our service providers, local and regional
governments, and communities to get through this crisis
together. We appreciate your continued support during
these challenging times and look forward to keeping you
updated on our progress.
Paul T. McDermott
Chairman & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-K
___________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-06622
___________________________________________________
WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
___________________________________________________
Maryland
(State of incorporation)
53-0261100
(IRS Employer Identification Number)
1775 EYE STREET, NW, SUITE 1000, WASHINGTON, DC 20006
(Address of principal executive office) (Zip code)
Registrant’s telephone number, including area code: (202) 774-3200
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Shares of Beneficial Interest
Trading Symbol
WRE
Name of each exchange on which registered
NYSE
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 28, 2019, the aggregate market value of such shares held by non-affiliates of the registrant was $2,125,135,478 (based on
the closing price of the stock on June 28, 2019).
As of February 13, 2020, 82,115,352 common shares were outstanding.
___________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement relating to the 2020 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission, are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K as indicated herein.
PART I
PART II
PART III
PART IV
WASHINGTON REAL ESTATE INVESTMENT TRUST
2019 FORM 10-K ANNUAL REPORT
INDEX
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
3
Page
4
8
27
28
29
29
30
31
32
50
52
52
52
52
55
55
55
55
55
56
58
59
ITEM 1: BUSINESS
WashREIT Overview
PART I
Washington Real Estate Investment Trust (“WashREIT”) is a self-administered equity real estate investment trust (“REIT”),
successor to a trust organized in 1960. Our business consists of the ownership and operation of income producing real estate
properties in the greater Washington metro region. We own a portfolio of multifamily and commercial (office and retail) properties.
During 2019, we acquired eight multifamily properties with a total of 2,390 units and sold eight retail properties (see note 3 to the
consolidated financial statements). The eight sold retail properties met the criteria for classification as discontinued operations.
The remaining retail properties do not meet the qualitative or quantitative criteria for a reportable segment (see note 14 to the
consolidated financial statements). The acquisitions of multifamily properties and dispositions of retail properties are part of a
strategic shift away from the retail sector to the multifamily sector. This strategic shift simplifies our portfolio to two reportable
segments (office and multifamily) and reduces our exposure to future retail lease expirations.
Our strategy is to generate returns and maximize shareholder value through proactive asset management and prudent capital
allocation decisions, as exemplified by the strategic shift discussed above. Consistent with this strategy, we invest in additional
income producing properties through acquisitions, development and redevelopment. We invest in properties where we believe we
will be able to improve the operating results and increase the value of the property. We focus on properties in the Washington
metro region, near major transportation nodes and in areas with strong employment drivers and superior growth demographics.
We will seek to continue to upgrade our portfolio as opportunities arise, funding development and acquisitions with a combination
of cash, equity, debt and proceeds from property sales.
While we have historically focused most of our investments in the greater Washington metro region, in order to maximize acquisition
opportunities we also may consider opportunities to replicate our strategy in other geographic markets which meet the criteria
described above.
All of our officers and employees live and work in or near the greater Washington metro region.
Our Regional Economy and Real Estate Markets
The Washington metro region experienced steady job growth during 2019 with approximately 52,300 net job additions, according
to Delta Associates / Transwestern Commercial Services (“Delta”), a national full-service real estate firm that provides market
research and evaluation services for commercial property. This job growth is significantly higher than the region's 20-year annual
average of 41,400 new jobs, with growth in the professional/business services sector partially offset by net job losses of 6,100 in
the retail, wholesale, and federal sectors. Current estimates by Delta indicate that the region's unemployment rate was 2.8% as of
October 2019, lower than the national average of 3.3%. Delta expects the job growth in the Washington metro region to continue
in 2020, but at a slower rate than 2019. Certain market statistics and information from several third-party providers for the
Washington metro region are set forth below:
Multifamily
Increase in net effective rents (Class A and B)
Increase in net effective rents (Class A)
Increase in net effective rents (Class B)
Stabilized vacancy rate (Class A and B)
Stabilized vacancy rate (Class A)
Stabilized vacancy rate (Class B)
New apartment deliveries (# of units)
______________________________
2019
2018
2.9%
2.9%
3.1%
4.0%
4.3%
3.8%
2.5%
2.4%
2.6%
4.5%
4.6%
4.4%
8,544
11,401
Source: RealPage Investment Analytics, a commercial real estate management software company that provides market research
According to RealPage Investment Analytics, the multifamily real estate market's higher effective rents and lower vacancy rates
in 2019 reflect a slowdown in the delivery of new units in the region, while demand remains strong. New apartment deliveries
4
are projected to increase to approximately 32,000 units in 2020, which is expected to suppress rental rate growth for Class A
apartments, while Class B apartments are expected to outperform Class A apartments in 2020.
Office
Average asking rent per square foot
$
Total vacancy rate at year end
Net absorption (in millions of square feet) (1)
Office space under construction at year end (in millions of square feet)
______________________________
Source: Jones Lang LaSalle ("JLL"), a commercial real estate services firm
(1)
Net absorption is defined as the change in occupied, standing inventory from one year to the next.
2019
2018
43.30
$
16.1%
4.5
9.8
42.07
16.4%
2.0
11.1
According to JLL, the increase in average asking rents in the Washington metro region was primarily due to private sector job
growth. The 2019 total vacancy rate is lower than the prior year and above the national average of 14.3%. JLL projects downward
pressure on occupancy and effective rents in 2020 due to the continuing addition of new space into the region.
Our Portfolio
As of December 31, 2019, we owned a diversified portfolio of 45 properties, totaling approximately 3.9 million square feet of
commercial space and 6,658 residential units and land held for development. These 45 properties consist of 21 multifamily
properties, 16 office properties and 8 retail centers. The percentage of total real estate rental revenue from continuing operations
by property type for the years ended December 31, 2019, 2018 and 2017, and the percent leased as of December 31, 2019, were
as follows:
Percent Leased at
December 31, 2019(2)
96%
92%
93%
Multifamily
Office
Other
% of Total Real Estate Rental Revenue
2019
2018
2017
41%
53%
6%
100%
33%
61%
6%
100%
34%
60%
6%
100%
______________________________
(2)
Calculated as the percentage of physical net rentable area leased, except for multifamily, which is calculated as the percentage of units leased. The net
rentable area leased for office and retail properties includes temporary lease agreements.
On a combined basis, our commercial portfolio (i.e., our office and retail properties, excluding properties classified as discontinued
operations) was 93%, 93% and 94% leased at December 31, 2019, 2018 and 2017, respectively.
Total real estate rental revenue from continuing operations for each of the three years ended December 31, 2019 was $309.2
million, $291.7 million and $280.3 million, respectively. During the three years ended December 31, 2019, we acquired eight
multifamily properties and two office properties, and substantially completed major construction activities at one office and one
retail redevelopment project. During that same period, we sold eight retail properties, four office properties and one multifamily
property. See note 14 to the consolidated financial statements for further discussion of our operating results by segment.
5
The commercial lease expirations for the next ten years and thereafter are as follows:
# of Leases
Square Feet
Gross Annual Rent
(in thousands)
Percentage of Total
Gross Annual Rent
Office:
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
Total
Other:
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
Total
44
54
44
53
53
39
29
28
13
11
16
384
6
8
17
17
16
7
6
4
3
4
3
91
206,129
231,444
396,514
294,864
287,728
269,393
400,310
310,003
135,360
53,166
432,753
3,017,664
19,867
69,141
113,970
66,930
143,464
60,815
24,659
51,682
10,108
12,235
24,572
597,443
$
$
$
$
7,465
9,222
19,520
14,803
15,267
10,940
16,641
18,328
7,849
3,159
18,404
141,598
350
1,410
2,420
1,570
3,193
1,161
964
1,190
783
741
1,042
14,824
5%
7%
14%
10%
11%
8%
12%
13%
6%
2%
12%
100%
2%
10%
16%
11%
22%
8%
7%
8%
5%
5%
6%
100%
According to Delta, the professional/business services and government sectors constituted over 40% of payroll jobs in the
Washington metro area at the end of 2019. Due to our geographic concentration in the Washington metro area, a significant number
of our tenants have historically been concentrated in the professional/business services and government sectors, although the exact
number will vary from time to time. As a result of this concentration, we are susceptible to business trends (both positive and
negative) that affect the outlook for these sectors.
No single tenant accounted for more than 5% of real estate rental revenue in 2019, 2018 or 2017. All federal government tenants
in the aggregate accounted for less than 1% of our real estate rental revenue in 2019.
6
Our ten largest commercial tenants, in terms of real estate rental revenue for 2019, are as follows:
1. World Bank (1)
2. Atlantic Media, Inc.
3. Booz Allen Hamilton, Inc. (2)
4. Capital One
5. Morgan Stanley Smith Barney Financing
6.
Pepco Energy Services, Inc.
7. Hughes Hubbard & Reed LLP
8. Epstein, Becker & Green, P.C.
9. B. Riley Financial, Inc
10. Promontory Interfinancial Network, LLC
______________________________
(1)
(2)
In December 2019, we completed the sale of 1776 G Street where the World Bank was a tenant. As of December 31, 2019, World Bank is no longer a
tenant. See note 3 to the consolidated financial statements.
In December 2019, we signed a purchase and sale agreement to sell John Marshall II where Booz Allen Hamilton Inc. is a tenant. John Marshall II was
classified as held for sale as of December 31, 2019. The sale is expected to close in the first quarter of 2020. Once completed, Booz Allen Hamilton, Inc.
will no longer be a tenant. See note 3 to the consolidated financial statements.
We enter into arrangements from time to time by which various service providers conduct day-to-day property management and/
or leasing activities at our properties. Bozzuto Management Company ("Bozzuto") and Greystar Real Estate Partners ("Greystar")
currently provide property management and leasing services at our multifamily properties. Bozzuto and Greystar provide such
services under individual property management agreements for each property, each of which is separately terminable by us or
Bozzuto/Greystar, as applicable. Although they vary by property, on average, the fees charged by the service provider under each
agreement are approximately 3% of revenues at each property.
We expect to continue investing in additional income-producing properties through acquisitions, development and redevelopment.
We invest in properties where we believe we will be able to improve the operating results and increase the value of the property.
Our properties typically compete for tenants with other properties on the basis of location, quality and rental rates.
We make capital improvements to our properties on an ongoing basis for the purpose of maintaining and increasing their value
and income. Major improvements and/or renovations to the properties during the three years ended December 31, 2019 are discussed
in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Capital
Improvements and Development Costs.”
Further description of the properties is contained in Item 2, Properties, and note 14 to the consolidated financial statements, Segment
Information, and in Schedule III. Reference is also made to Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
On February 13, 2020, we had 125 employees including 58 persons engaged in property management functions and 67 persons
engaged in corporate, financial, leasing, asset management and other functions.
REIT Tax Status
We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"),
and intend to continue to qualify as such. To maintain our status as a REIT, we are among other things required to distribute 90%
of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains), to our shareholders
on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold,
in a way that allows us to defer recognition of some or all of the taxable gain realized on the sale, (b) distributing gains to the
shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying
the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on
undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject
to corporate U.S. federal, state and local income tax on their taxable income at regular statutory rates (see note 1 to the consolidated
financial statements for further disclosure).
7
Availability of Reports
Copies of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
any amendments to such reports are available, free of charge, on our website www.washreit.com. All required reports are made
available on the website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and
Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information
contained in the website and such information should not be considered part of this document.
The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy statements,
information statements, and other information regarding issuers that file electronically with Securities and Exchange Commission.
ITEM 1A: RISK FACTORS
Set forth below are the risks that we believe are material to our shareholders. We refer to the shares of beneficial interest in
WashREIT as our “common shares,” and the investors who own shares as our “shareholders.” This section includes or refers
to certain forward-looking statements. You should refer to the explanation of the qualifications and limitations on such forward-
looking statements beginning on page 47.
Risks Related to our Business and Operations
Our performance and value are subject to risks associated with our real estate assets and with the real estate industry, which
could adversely affect our cash flow and ability to pay distributions to our shareholders.
Our financial performance and the value of our real estate assets are subject to the risk that our properties do not generate revenues
sufficient to meet our operating expenses, debt service and capital expenditures, which could cause our cash flow and ability to
pay distributions to our shareholders to be adversely affected. The following factors, among others, may adversely affect the cash
flow generated by our multifamily and commercial properties:
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downturns in the national, regional and local economic climate;
declines in the financial condition of our tenants;
declines in consumer confidence, unemployment rates and consumer tastes and preferences;
significant job losses in the professional/business services industries or government;
competition from similar asset class properties;
the inability or unwillingness of our tenants to pay rent increases;
changes in market rental rates and related concessions granted to tenants including, but not limited to, free rent and tenant
improvement allowances;
local real estate market conditions, such as oversupply or reduction in demand for multifamily and commercial
properties;
changes in interest rates and availability of financing;
increased operating costs, including insurance premiums, utilities and real estate taxes;
vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;
inflation;
civil disturbances, earthquakes and other natural disasters, terrorist acts or acts of war; and
decreases in the underlying value of our real estate.
We are dependent upon the economic and regulatory climate of the Washington metropolitan region, which may impact our
profitability and may limit our ability to meet our financial obligations when due and/or make distributions to our shareholders.
All of the properties in our portfolio are located in the Washington metro region and such concentration may expose us to a greater
amount of market dependent risk than if we were geographically diverse. General economic conditions and local real estate
conditions in the Washington metro region are dependent upon various industries that are predominant in our area (such as
government and professional/business services). A downturn in one or more of these industries may have a particularly strong
effect on the economic climate of our region. Additionally, we are susceptible to adverse developments in the Washington D.C.
regulatory environment, such as increases in real estate and other taxes, the costs of complying with governmental regulations or
increased regulations and actual or threatened reductions in federal government spending and/or changes to the timing of
government spending, as has occurred during recent federal government shutdowns. In the event of negative economic and/or
regulatory changes in our region, we may experience a negative impact to our profitability and may be limited in our ability to
meet our financial obligations when due and/or make distributions to our shareholders.
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We face potential difficulties or delays renewing leases or re-leasing space, and as a result, our financial condition, results of
operations, cash flow and our ability to satisfy our principal and interest obligations and to make distributions to our shareholders
could be adversely affected.
As of December 31, 2019, the percentage of leased square footage of our commercial properties will expire as set forth in the
lease expiration tables on page 6. Multifamily properties are leased under operating leases with terms of generally one year or
less. For each the three years ended December 31, 2019, 2018 and 2017, the multifamily tenant retention rate was 56%, 55%, and
59%, respectively.
Difficulties or delays renewing leases or releasing space could impact our financial condition and ability to make distributions.
We derive substantially all of our income from rent received from tenants. If our tenants decide not to renew their leases, we may
face delays or difficulties re-leasing the space. If tenants decide to renew their leases, the terms of renewals, including the cost of
required improvement allowances or concessions, may be less favorable to WashREIT than current lease terms. If the rental rates
of our properties decrease, our existing tenants do not renew their leases (refer to the list of our ten largest tenants as of December 31,
2019 on page 7) or we do not re-lease a significant portion of our available and soon-to-be-available space, our financial condition,
results of operations, cash flow and our ability to satisfy our principal and interest obligations and to make distributions to our
shareholders could be adversely affected.
Real estate investments are illiquid, and we may not be able to sell our properties on a timely basis when we determine it is
appropriate to do so, which could negatively impact our profitability.
Real estate investments can be difficult to sell and convert to cash quickly, especially if market conditions are not favorable. Such
illiquidity could limit our ability to quickly change our portfolio of properties in response to changes in economic or other conditions.
Moreover, the tax laws applicable to REITs require that we hold our properties for investment, rather than primarily for sale in
the ordinary course of business, which may cause us to forego or defer property sales that otherwise would be in our best interest.
Due to these factors, we may be unable to sell a property at an advantageous time or on the terms anticipated which could negatively
impact our profitability.
The composition of our portfolio by asset class may change over time, which could expose us to different asset class risks than
if our portfolio composition remained static.
We own multifamily and commercial assets, with multifamily and office representing approximately 93% of our net operating
income for the year ended December 31, 2019, and approximately 93% of our portfolio based on square footage as of December 31,
2019. If the composition of our portfolio changes, then we would become more exposed to the risks and markets of other asset
classes. If we are successful in executing the strategic capital allocation plan, then we will become more exposed to the risks of
the multifamily and office markets, any of which could have a material adverse effect on us.
We may not be able to control our operating expenses or our operating expenses may remain constant or increase, even if our
revenues do not increase, causing our financial condition, results of operations, cash flows, per share trading price of our
common shares and ability to make distributions to our shareholders to be adversely affected.
Operating expenses associated with owning a property include real estate taxes, insurance, loan payments, maintenance, repair
and renovation costs, the cost of compliance with governmental regulation (including zoning) and the potential for liability under
applicable laws. If our operating expenses increase, our results of operations may be adversely affected. Moreover, operating
expenses are not necessarily reduced when circumstances such as market factors, competition or reduced occupancy cause a
reduction in revenues from the property. As a result, if revenues decline, we may not be able to reduce our operating expenses
associated with the property. If we are unable to control or adjust our operating expenses accordingly, our financial condition,
results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders
may be adversely affected.
We may be adversely affected by any significant reductions in federal government spending or actual or threatened changes
to the timing of federal government spending, which could have an adverse effect on our financial condition, results of
operations, cash flows and ability to make distributions to our shareholders.
As a REIT focused on the Washington metro region, a significant portion of our properties is occupied by tenants that directly or
indirectly serve the U. S. Government as federal contractors or otherwise. A significant reduction in federal government spending,
particularly a sudden decrease due to a sequestration process, such as occurred in recent years, or due to extended uncertainty in
the political climate in a way that affects the federal appropriations process by decreasing, delaying or making uncertain the results,
stability and timing of federal appropriations, could adversely affect the ability of these tenants to fulfill lease obligations or
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decrease the likelihood that they will renew their leases with us. Further, economic conditions in the Washington metro region are
significantly dependent upon the level of federal government spending in the region as a whole. In the event of an actual or
anticipated significant reduction in federal government spending or change in the timing of federal government spending, there
could be negative economic changes in our region, which could adversely impact the ability of our tenants to meet their financial
obligations under our leases or the likelihood of their lease renewals. As a result, if such a reduction in federal government spending
or actual or threatened change to the timing of federal government spending were to occur or be anticipated for an extended period,
we could experience an adverse effect on our financial condition, results of operations, cash flows and ability to make distributions
to our shareholders.
We face risks associated with property development/redevelopment, which could have an adverse effect on our financial
condition, results of operations or ability to satisfy our debt service obligations.
We may, from time to time, engage in development and redevelopment activities, some of which may be significant. Developing
or redeveloping properties presents a number of risks for us, including risks that:
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if we are unable to obtain all necessary zoning and other required governmental permits and authorizations or cease
development of the project for any other reason, the development opportunity may be abandoned or postponed after
expending significant resources, resulting in the loss of deposits or failure to recover expenses already incurred;
the development and construction costs of the project may exceed original estimates due to increased interest rates and
increased cost of materials, labor, leasing or other expenditures, which could make the completion of the project less
profitable because market rents may not increase sufficiently to compensate for the increase in construction costs;
construction and/or permanent financing may not be available on favorable terms or may not be available at all, which
may cause the cost of the project to increase and lower the expected return;
the project may not be completed on schedule, or at all, as a result of a variety of factors, many of which are beyond our
control, such as weather, labor conditions and material shortages, which would result in increases in construction costs
and debt service expenses;
the time between commencement of a development project and the stabilization of the completed property exposes us to
risks associated with fluctuations in local and regional economic conditions;
occupancy rates and rents at the completed property may not meet the expected levels and could be insufficient to make
the property profitable; and
there may not be sufficient development opportunities available.
Properties developed or acquired for development may generate little or no cash flow from the date of acquisition through the
date of completion of development. In addition, new development activities, regardless of whether or not they are ultimately
successful, may require a substantial portion of management’s time and attention.
These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion
of development activities once undertaken. Any of the foregoing could have an adverse effect on our financial condition, results
of operations or ability to satisfy our debt service obligations.
We face potential adverse effects from major tenants' bankruptcies or insolvencies, which could adversely affect our cash flow
and results of operations.
The bankruptcy or insolvency of a major tenant may adversely affect the income produced by a property. We cannot evict a tenant
solely because of its bankruptcy. On the other hand, a court might authorize the tenant to reject and terminate its lease. In such
case, our claim against the bankrupt tenant for unpaid, future rent would be subject to a statutory cap that might be substantially
less than the remaining rent actually owed under the lease. As a result, our claim for unpaid rent would likely not be paid in full.
This shortfall could adversely affect our cash flow and results of operations. If a tenant experiences a downturn in its business or
other types of financial distress, it may be unable to make timely rental payments.
Competition for tenants of our multifamily properties, including as a result of increased affordability of residential homes,
could affect occupancy levels and market rents at our multifamily properties, which could adversely affect our results of
operations and our financial condition.
Our multifamily properties compete with numerous housing alternatives in attracting residents, including owner occupied single
and multifamily homes. Occupancy levels and market rents may be adversely affected by national and local political, economic
and market conditions including, without limitation, new construction and excess inventory of multifamily and owned housing/
condominiums, increasing portions of owned housing/condominium stock being converted to rental use, rental housing subsidized
by the government, other government programs that favor single family rental housing or owner occupied housing over multifamily
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rental housing, governmental regulations, slow or negative employment growth and household formation, the availability of low-
interest mortgages or the availability of mortgages requiring little or no down payment for single family home buyers, changes in
social preferences and the potential for geopolitical instability, all of which are beyond our control. Finally, the federal government’s
policies, many of which may encourage home ownership, can increase competition and could possibly limit our ability to raise
rents in our markets and therefore lower the value of our properties. Competitive housing in a particular area and increased
affordability of owner occupied single and multifamily homes could adversely affect our ability to retain our current residents,
attract new ones or increase or maintain rents, which could adversely affect our results of operations and our financial condition.
We face risks associated with property acquisitions.
We may acquire properties which would increase our size and could alter our capital structure. Our acquisition activities and results
may be exposed to the following risks:
• we may have difficulty finding properties that are consistent with our strategies and that meet our standards;
• we may have difficulty negotiating with new or existing tenants;
• we may be unable to finance acquisitions on favorable terms or at all;
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the occupancy levels, lease-up timing and rental rates may not meet our expectations;
even if we enter into an acquisition agreement for a property, we may be unable to complete that acquisition after making
a non-refundable deposit and incurring certain other acquisition-related costs;
competition from other real estate investors may significantly increase the purchase price;
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even if we enter into an acquisition agreement for a property, it would typically be subject to customary conditions to
closing, including completion of due diligence investigations, which may have findings that are unacceptable;
the timing of property acquisitions may lag the timing of property dispositions, leading to periods of time where projects'
proceeds are not invested as profitably as we desire;
the acquired properties may fail to perform as we expected in analyzing our investments;
the actual returns realized on acquired properties may not exceed our cost of capital;
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into our existing operations;
our estimates of capital expenditures required for an acquired property, including the costs of repositioning or redeveloping,
may be inaccurate; and
• we could experience a decline in value of the acquired assets after acquisition.
We may acquire properties subject to liabilities and without recourse, or with limited recourse with respect to unknown liabilities.
As a result, if liability were asserted against us based upon the acquisition of a property, we may have to pay substantial sums to
settle it, which could adversely affect our cash flow. Unknown liabilities with respect to properties acquired might include:
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liabilities for clean-up of undisclosed environmental contamination;
claims by tenants, vendors or other persons dealing with the former owners of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of
the properties.
We face risks associated with third-party service providers, which could negatively impact our profitability.
We enter into arrangements from time to time by which various service providers conduct day-to-day property management and/
or leasing activities at our properties. Failure of such service providers to adequately perform their contracted services could
negatively impact our ability to retain tenants or lease vacant space. As a result, any such failure could negatively impact our
profitability.
We may suffer economic harm as a result of the actions of our partners in real estate joint ventures and other investments
which may adversely affect our operations.
While we have no interests in joint ventures following our purchase of the remaining 10% interest in The Maxwell during the
fourth quarter of 2017, we may from time to time invest in joint ventures in which we are not the exclusive investor or the only
decision maker. Investments in such entities may involve risks not present when a third party is not involved, including the
possibility that the other parties to these investments might become bankrupt or fail to fund their share of required capital
contributions, and we may be forced to make contributions to maintain the value of the property. Our partners in these entities
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may have economic, tax or other business interests or goals that are inconsistent with our business interests or goals, and may be
in a position to take actions contrary to our policies or objectives. Such investments may also lead to impasses, for example, as
to whether to sell a property, because neither we nor the other parties to these investments may have full control over the entity.
In addition, we may in certain circumstances be liable for the actions of the other parties to these investments. Each of these factors
could have an adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our
shareholders. In some instances, joint venture partners may have competing interests that could create conflicts of interest. These
conflicts may include compliance with the REIT requirements, and our REIT status could be jeopardized if any of our joint ventures
do not operate in compliance with the REIT requirements. To the extent our joint venture partners do not meet their obligations
to us or they take action inconsistent with our interests in the joint venture, we may be adversely affected.
Our real estate taxes could increase due to property tax rate changes or reassessment, which could impact our cash flows our
financial condition, results of operations, cash flows, per share market price of our common shares and our ability to satisfy
our principal and interest obligations and to make distributions to our shareholders could be adversely affected.
Even though we qualify as a REIT for U.S. federal income tax purposes, we are required to pay state and local taxes on our
properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed
or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from
what we have paid in the past. If the property taxes we pay increase, our financial condition, results of operations, cash flows, per
share market price of our common shares and our ability to satisfy our principal and interest obligations and to make distributions
to our shareholders could be adversely affected.
Our properties face significant competition which could adversely affect our ability to lease our properties and result in lower
cash flows.
We face significant competition from developers, owners and operators of multifamily, office and other real estate. Substantially
all of our properties face competition from similar properties in the same market. Such competition may affect our ability to attract
and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than
our properties, which may result in their owners being willing to make space available at lower rents than the space in our properties.
As a result, it may be more difficult for us to lease our space, which would result in lower cash flows.
We face risks associated with short-term liquid investments, which could adversely affect our results of operations or financial
condition.
We periodically may have cash balances that we invest in a variety of short-term investments that are intended to preserve principal
value and maintain a high degree of liquidity while providing current income. From time to time, these investments may include
(either directly or indirectly):
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direct obligations issued by the U.S. Treasury;
obligations issued or guaranteed by the U.S. government or its agencies;
taxable municipal securities;
obligations (including certificates of deposit) of banks and thrifts;
commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by
corporations and banks;
repurchase agreements collateralized by corporate and asset-backed obligations;
registered and unregistered money market funds; and
other highly-rated short-term securities.
Investments in these securities and funds are not insured against loss of principal. Under certain circumstances, we may be required
to redeem all or part of our investment, and our right to redeem some or all of our investment may be delayed or suspended. In
addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the
value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of
operations or financial condition.
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Compliance or failure to comply with the Americans with Disabilities Act and other laws and regulations could result in
substantial costs and adversely affect our results of operations.
The Americans with Disabilities Act (“ADA”) generally requires that public buildings, including multifamily and commercial
properties, be made accessible to disabled persons. Noncompliance could result in imposition of fines by the federal government
or the award of damages to private litigants. If, pursuant to the ADA, we are required to make substantial alterations and capital
expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our results of
operations.
We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state and local
regulatory requirements, such as state and local fair housing, rent control and fire and life safety requirements. If we fail to comply
with these requirements, we may incur fines or private damage awards. We believe that our properties are currently in material
compliance with regulatory requirements. However, we do not know whether existing requirements will change in the future or
whether compliance with future requirements will require significant unanticipated expenditures that will adversely affect our
results of operations.
Climate change and regulation regarding climate change in the Washington metro region may adversely affect our financial
condition, results of operations, cash flows, per share market price of our common shares and our ability to satisfy our principal
and interest obligations and to make distributions to our shareholders.
Climate change (including rising sea levels, flooding, extreme weather, and changes in precipitation and temperature), may result
in physical damage to, a decrease in demand for and/or a decrease in rent from and value of our properties located in the areas
affected by these conditions. Additionally, our insurance premiums may increase as a result of the threat of climate change or the
effects of climate change may not be covered by our insurance policies.
Changes in federal and state legislation and regulations on climate change could result in utility expenses and/or capital expenditures
to improve the energy efficiency of our existing properties or other related aspects of our properties in order to comply with such
regulations or otherwise adapt to climate change. The District of Columbia, Arlington County, Virginia, Fairfax County, Virginia,
and Montgomery County, Maryland, each have made formal public commitments to carbon reduction. To enforce this commitment,
the Washington DC City Council passed the DC Clean Energy Omnibus bill. The bill requires that all electricity purchased in the
District be renewable by 2032 and sets a building energy performance standard (BEPS) requiring certain buildings to meet certain
minimum energy efficiency standards. Under the District of Columbia’s Building Energy Performance Standards (“BEPS”), all
existing buildings over 50,000 square feet will be required to reach minimum levels of energy efficiency or deliver savings by
2026, with progressively smaller buildings phasing into compliance over the following years. This regulation may require unplanned
capital improvements, and increased engagement to manage occupant energy use, which is a large driver of building performance.
If our properties cannot meet performance standards, they risk fines for non-compliance, as well as a decrease in demand and a
decline in value. As a result, our financial condition, results of operations, cash flows, per share market price of our common shares
and our ability to satisfy our principal and interest obligations and to make distributions to our shareholders could be adversely
affected.
Some potential losses are not covered by insurance, which could adversely affect our financial condition or cash flow.
We carry insurance coverage on our properties of types and in amounts that we believe are in line with coverage customarily
obtained by owners of similar properties. We believe all of our properties are adequately insured. The property insurance that we
maintain for our properties has historically been on an “all risk” basis, which is in full force and effect until renewal in August
2020. There are other types of losses, such as from wars or catastrophic events, for which we cannot obtain insurance at all or at
a reasonable cost.
We have an insurance policy that has no terrorism exclusion, except for non-certified nuclear, chemical and biological acts of
terrorism. Our financial condition and results of operations are subject to the risks associated with acts of terrorism and the potential
for uninsured losses as the result of any such acts. Effective November 26, 2002, under this existing coverage, any losses caused
by certified acts of terrorism would be partially reimbursed by the United States under a formula established by federal law. Under
this formula, the United States pays 85% of covered terrorism losses exceeding the statutorily established deductible paid by the
insurance provider, and insurers pay 10% until aggregate insured losses from all insurers reach $100 billion in a calendar year. If
the aggregate amount of insured losses under this program exceeds $100 billion during the applicable period for all insured and
insurers combined, then each insurance provider will not be liable for payment of any amount which exceeds the aggregate amount
of $100 billion. On December 20, 2019, The Terrorism Risk Insurance Program Reauthorization Act of 2019 was signed into law,
extending the program through December 31, 2027. We continue to monitor the state of the insurance market in general, and the
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scope and costs of coverage for acts of terrorism in particular, but we cannot anticipate what amount of coverage will be available
on commercially reasonable terms in future policy years.
In the event of an uninsured loss or a loss in excess of our insurance limits, we could lose both the revenues generated from the
affected property and the capital we have invested in the affected property. Depending on the specific circumstances of the affected
property it is possible that we could be liable for any mortgage indebtedness or other obligations related to the property. Any such
loss could adversely affect our business and financial condition and results of operations.
In most cases, we have to renew our policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the
volatility of the insurance markets, including the possibility of rate increases. Any material increase in insurance rates or decrease
in available coverage in the future could adversely affect our results of operations and financial condition.
Property ownership also involves potential liability to third parties for such matters as personal injuries occurring on the property.
Such losses may not be fully insured. In addition to uninsured losses, various government authorities may condemn all or parts
of operating properties. Such condemnations could adversely affect the viability of such projects. Any such uninsured loss could
adversely affect our financial condition or cash flow.
Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.
All of the properties in our portfolio are located in or near Washington, DC, a metropolitan area that has been and may in the future
be the target of actual or threatened terrorism attacks. As a result, some tenants in our market may choose to relocate their businesses
to other markets. This could result in an overall decrease in the demand for commercial space in this market generally, which
could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms, or both. In addition,
future terrorist attacks in or near Washington, DC could directly or indirectly damage such properties, both physically and
financially, or cause losses that materially exceed our insurance coverage. As a result of the foregoing, our ability to generate
revenues and the value of our properties could decline materially which would negatively affect our results of operations.
Litigation could have a material adverse effect on our financial condition or results from operations.
From time to time, we are involved in legal proceedings and other claims. We may also be named as defendants in lawsuits allegedly
arising out of our actions or out of those of our vendors, contractors, tenants or other parties which have agreed to indemnify,
defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective
businesses and/or added as an additional insured under certain insurance policies. An unfavorable resolution of any legal proceeding
could have a material adverse effect on our financial condition or results from operations. Regardless of its outcome, legal
proceedings may result in substantial costs and expenses and significantly divert the attention of our management. With respect
to any legal proceeding, there can be no assurance that we will be able to prevail, or achieve a favorable settlement or outcome,
or that our insurance or the insurance and/or any contractual indemnities of our vendors, contractors, tenants or other parties will
be enough to cover all of our defense costs or any resulting liabilities. Any such litigation could have a material adverse effect on
our financial condition or results from operations.
Potential liability for environmental matters could result in substantial costs, which could have an adverse effect on our financial
condition and results of operations.
Under U.S. federal, state and local environmental laws, ordinances and regulations, we may be liable for costs and damages
resulting from the presence or release of hazardous or toxic substances, wastes or petroleum products at our properties, including
investigation or cleanup costs, bodily injury or property damage, natural resource damages, or we may be required to pay for such
costs and damages incurred by a government entity or third party regardless of our knowledge or responsibility, simply because
of our current or past ownership or operation of the real estate. If environmental contamination issues arise, we may have to make
substantial payments, which could adversely affect our cash flow and our ability to make distributions to our shareholders, because
(1) as a current or former owner or operator of real property we may have to pay for property damage and for investigation and
clean-up costs incurred in connection with the contamination; (2) the law typically imposes clean-up responsibility and liability
regardless of whether the owner or operator knew of or caused the contamination; (3) even if more than one person may be
responsible for the contamination, each person who shares legal liability under such environmental laws may be held responsible
for all of the clean-up costs; and (4) governmental entities and third parties may sue the owner or operator of a contaminated site
for damages and costs. We also may be liable for the costs of removal or remediation of hazardous substances or waste at disposal
or treatment facilities if we arranged for disposal or treatment of hazardous substances to such facilities, whether or not we own
such facility.
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In addition, certain federal, state and local governmental authorities, such as the U.S. Environmental Protection Agency and the
U.S. Occupational Safety and Health Administration, may require the clean up or abatement of asbestos, mold, and lead-based
paint, which can be costly. Laws applicable to buildings containing certain asbestos-containing materials (“ACM”) impose multiple
requirements, including:
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properly managing and maintaining the ACM;
notifying and training those who may come into contact with the ACM; and
undertaking special precautions, including removal or other abatement, if the ACM would be disturbed during
renovation or demolition of a building.
Such laws may impose fines and penalties on building owners, operators or employers who fail to comply with these requirements
and may allow third parties to seek recovery from owners or operators for personal injury or property damage associated with
exposure to asbestos fibers.
As building owners or operators we are also subject to inquiries about indoor air quality. These inquiries may necessitate special
investigation and, depending on the results, remediation beyond our regular indoor air quality testing and maintenance programs.
Indoor air quality issues can stem from building materials, inadequate ventilation, chemical contaminants from indoor or outdoor
sources, and biological contaminants such as molds, pollen, viruses and bacteria. Indoor exposure to chemical or biological
contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in
susceptible individuals. If these conditions were to occur at one of our properties, we may be subject to third-party claims for
personal injury, or may need to undertake a targeted remediation program, including without limitation, steps to increase indoor
ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary
relocation of some or all of the property’s tenants or require rehabilitation of the affected property.
The costs associated with these issues could be substantial and, in extreme cases, could exceed the value of the contaminated
property. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination
may adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws
may create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.
Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which
property may be used or businesses may be operated, and these restrictions may result in substantial expenditures or liabilities.
It is our policy to retain independent environmental consultants to conduct Phase I environmental site assessments and asbestos
surveys with respect to our acquisition of properties. These assessments generally include a visual inspection of the properties and
the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of
relevant state, federal and historical documents. Our evaluation of environmental conditions does not always involve invasive
techniques such as soil and ground water sampling. When appropriate, on a property-by-property basis, our practice is to have
these consultants conduct additional testing. However, even though these additional assessments may be conducted, there is still
the risk that:
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the environmental assessments and updates did not identify all potential environmental liabilities;
a prior owner created a material environmental condition that is not known to us or the independent consultants
preparing the assessments;
new environmental liabilities have developed since the environmental assessments were conducted; and
future uses or conditions or changes in applicable environmental laws and regulations could result in environmental
liability to us.
In addition, our properties are subject to various U.S. federal, state, and local environmental, health and safety regulatory
requirements that address a wide variety of issues. Noncompliance with these environmental and health and safety laws and
regulations could subject us or our tenants to liability, including significant fines or penalties. These liabilities could affect a tenant’s
ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with such laws
and regulations or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise
adversely affect our operations, or those of our tenants, which could in turn have an adverse effect on us.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make
distributions to our shareholders or that such costs, liabilities or other remedial measures will not have an adverse effect on our
financial condition and results of operations.
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We face cybersecurity risks and risks associated with security breaches which have the potential to disrupt our operations,
cause material harm to our financial condition, result in misappropriation of assets, compromise confidential information
and/or damage our business relationships and can provide no assurance that the steps we and our service providers take in
response to these risks will be effective.
We face cybersecurity risks and risks associated with security breaches or disruptions, such as through cyber-attacks or cyber
intrusions over the Internet, malware, computer viruses, attachments to emails, social engineering and phishing schemes or persons
inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including
by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and
sophistication of attempted attacks and intrusions from around the world have increased. These incidents may result in disruption
of our operations, material harm to our financial condition, cash flows and the market price of our common shares, misappropriation
of assets, compromise or corruption of confidential information collected in the course of conducting our business, liability for
stolen information or assets, increased cybersecurity protection and insurance costs, regulatory enforcement, litigation and damage
to our stakeholder relationships. These risks require continuous and likely increasing attention and other resources from us to,
among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately
address them and provide periodic training for our employees to assist them in detecting phishing, malware and other schemes.
Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective.
Additionally, we rely on third-party service providers in our conduct of day-to-day property management, leasing and other
activities at our properties and we can provide no assurance that the networks and systems that our third-party vendors have
established or used will be effective.
In the normal course of business, we and our service providers (including service providers engaged in providing property
management, leasing, accounting and/or payroll services) collect and retain certain personal information provided by our tenants,
employees and vendors. We also rely extensively on computer systems to process transactions and manage our business. We can
provide no assurance that the data security measures designed to protect confidential information on our systems established by
us and our service providers will be able to prevent unauthorized access to this personal information. There can be no assurance
that our efforts to maintain the security and integrity of the information we and our service providers collect and our and their
computer systems will be effective or that attempted security breaches or disruptions would not be successful or damaging with
the potential for disruption in our operations, material harm to our financial condition, cash flows and the market price of our
common shares, increased cybersecurity protection and insurance costs, regulatory enforcement, litigation and damage to our
stakeholder relationships.
We are subject to risks from natural disasters and severe weather which could increase our operating costs and reduce our
cash flow.
Natural disasters and severe weather such as earthquakes, hurricanes, floods or blizzards may result in significant damage to our
properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the
severity of the event and the total amount of exposure in the affected area. Because the properties in our portfolio are concentrated
in a single region, a single catastrophe or destructive weather event may have a significant negative effect on our financial condition
and results of operations. As a result, our operating and financial results may vary significantly from one period to the next. We
are also exposed to risks associated with inclement winter weather, including increased need for maintenance and repair of our
buildings. In addition, climate change, to the extent it causes changes in weather patterns, could have effects on our business by
increasing the cost of property insurance, energy and/or snow removal at our properties. As a result, the consequences of natural
disasters, severe weather and climate change could increase our costs and reduce our cash flow.
We may experience a decline in the fair value of our assets, which may have a material impact on our financial condition,
liquidity and results of operations and adversely impact the market value of our securities.
A decline in the fair market value of our assets may require us to recognize an other-than-temporary impairment against such
assets under Generally Accepted Accounting Principles ("GAAP") if we were to determine that we do not have the ability and
intent to hold any assets in unrealized loss positions to maturity or for a period of time sufficient to allow for recovery to the
amortized cost of such assets. In such event, we would recognize unrealized losses through earnings and write down the amortized
cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-
temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition. Subsequent disposition or sale
of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received
and adjusted amortized cost of such assets at the time of sale, which may adversely affect our financial condition, liquidity and
results of operations. In addition, a significant economic downturn over a period of time could result in an event or change in
circumstances that results in an impairment in the value of our properties or our investments in joint ventures. An impairment loss
is recognized if the carrying amount of the asset is not recoverable over its expected holding period and exceeds its fair value.
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There can be no assurance that we will not take charges in the future related to the impairment of our assets or investments. Any
future impairment could have a material adverse effect on our financial condition, liquidity or results of operations.
Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents and pass
through new or increased operating costs to our tenants.
Certain states and municipalities, including Washington, DC, have adopted laws and regulations imposing restrictions on the
timing or amount of rent increases or have imposed regulations relating to low- and moderate-income housing. Such laws and
regulations limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and
could make it more difficult for us to dispose of properties in certain circumstances. Similarly, compliance procedures associated
with rent control statutes and low- and moderate-income housing regulations could have a negative impact on our operating costs,
and any failure to comply with low- and moderate-income housing regulations could result in the loss of certain tax benefits and
the forfeiture of rent payments. In addition, such low- and moderate-income housing regulations often require us to rent a certain
number of units at below-market rents, which has a negative impact on our ability to increase cash flows from our properties
subject to such regulations. Furthermore, such regulations may negatively impact our ability to attract higher-paying tenants to
such properties.
We are dependent on key personnel and the loss of such personnel could adversely affect our results of operations and financial
condition.
The execution of our investment strategy and management of our operations depend to a significant degree on our senior
management team. If we are unable to attract and retain skilled executives, our results of operations and financial condition could
be adversely affected.
Risks Related to Financing
We face risks associated with the use of debt, including refinancing risk.
We rely on borrowings under our credit facility, mortgage notes, and may rely on offerings of debt securities to finance acquisitions
and development activities and for general corporate purposes. In the past, the commercial real estate debt markets have experienced
significant volatility due to a number of factors, including the tightening of underwriting standards by lenders and credit rating
agencies and the reported significant inventory of unsold mortgage-backed securities in the market. The volatility resulted in
investors decreasing the availability of debt financing as well as increasing the cost of debt financing. Circumstances could again
arise in which we may not be able to obtain debt financing in the future on favorable terms, or at all. If we were unable to borrow
under our credit facility or to refinance existing debt financing, our financial condition and results of operations would likely be
adversely affected.
We are subject to the risks normally associated with debt, including the risk that our cash flow may be insufficient to meet required
payments of principal and interest. We anticipate that only a small portion of the principal of our debt will be repaid prior to
maturity. Therefore, we are likely to need to refinance a significant portion of our outstanding debt as it matures. There is a risk
that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the
existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources,
such as new equity capital, our cash flow may not be sufficient to repay all maturing debt in years when significant “balloon”
payments come due. In addition, we may rely on debt to fund a portion of our new investments such as our acquisition and
development activity. There is a risk that we may be unable to finance these activities on favorable terms or at all. These conditions,
which increase the cost and reduce the availability of debt, may continue or worsen in the future. If any of these risks were to
happen, it would adversely affect our financial condition and results of operations.
Our degree of leverage could limit our ability to obtain additional financing, affect the market price of our common shares or
debt securities or otherwise adversely affect our financial condition.
On February 13, 2020, our total consolidated debt was approximately $1.1 billion. Consolidated debt to consolidated market
capitalization ratio, which measures total consolidated debt as a percentage of the aggregate of total consolidated debt plus the
market value of outstanding equity securities, is often used by analysts to assess leverage for equity REITs such as us. Our market
value is calculated using the price per share of our common shares. Using the closing share price of $32.02 per share of our common
shares on February 13, 2020, multiplied by the number of our common shares, our consolidated debt to total consolidated market
capitalization ratio was approximately 30% as of February 13, 2020.
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Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions,
development or other general corporate purposes. Our senior unsecured debt is currently rated investment grade by two major
rating agencies. However, there can be no assurance that we will be able to maintain this rating, and in the event our senior debt
is downgraded from its current rating, we would likely incur higher borrowing costs and/or difficulty in obtaining additional
financing. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally. There
is a risk that changes in our debt to market capitalization ratio, which is in part a function of our share price, or our ratio of
indebtedness to other measures of asset value used by financial analysts, may have an adverse effect on the market price of our
equity or debt securities.
Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fully
implement our capital expenditure, acquisition and redevelopment activities, or meet the REIT distribution requirements imposed
by the Code. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse
consequences, including the following:
•
require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on,
indebtedness, thereby reducing the funds available for other purposes;
• make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other
•
•
things, adversely affect our ability to meet operational needs;
restrict us from making strategic acquisitions, developing properties or exploiting business opportunities;
force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application
of the 100% tax on income from prohibited transactions or in violation of certain covenants to which we may be
subject);
subject us to increased sensitivity to interest rate increases;
•
• make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
•
•
limit our ability to withstand competitive pressures;
limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the
terms of our original indebtedness;
reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/
or
place us at a competitive disadvantage to competitors that have relatively less debt than we have.
•
•
If any one of these events were to occur, our financial condition, results of operations, cash flow and market price of our common
shares could be adversely affected.
Rising interest rates would increase our interest costs which could adversely affect our cash flow and ability to pay distributions.
We incur indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which
could adversely affect our cash flow and our ability to service debt. As a protection against rising interest rates, we may enter into
agreements such as interest rate swaps, caps, floors and other interest rate exchange contracts. These agreements, however, increase
our risks that other parties to the agreements may not perform or that the agreements may be unenforceable. In addition, an increase
in interest rates could decrease the amounts third-parties are willing to pay for our assets, thereby limiting our ability to change
our portfolio promptly in response to changes in economic or other conditions.
Failure to effectively hedge against interest rate changes may adversely affect our financial condition, results of operations,
cash flow, per share market price of our common shares and ability to make distributions to our shareholders and the future
of the reference rate used in our existing hedging arrangements is uncertain, which could hinder our ability to maintain
effective hedges.
We enter into hedging transactions to protect ourselves from the effects of interest rate fluctuations on variable rate debt. Our
hedging transactions include entering into interest rate cap agreements or interest rate swap agreements. These agreements involve
risks, such as the risk that such arrangements would not be effective in reducing our exposure to interest rate changes or that a
court could rule that such an agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly
during periods of rising and volatile interest rates. Failure to hedge effectively against interest rate changes could materially
adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability
to make distributions to our shareholders. In addition, while such agreements would be intended to lessen the impact of rising
interest rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, and that the
hedging arrangements may not be effective in reducing our exposure to interest rate changes. In addition, the REIT provisions of
the Code impose certain restrictions on our ability to utilize hedges, swaps and other types of derivatives to hedge our liabilities.
Moreover, there can be no assurance that our hedging arrangements will qualify as highly effective cash flow hedges under Financial
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Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging, or that
our hedging activities will have the desired beneficial impact on our results of operations. Should we desire to terminate a hedging
agreement, there could be significant costs and cash requirements involved to fulfill our obligation under the hedging agreement.
The future of the reference rate used in our existing floating rate debt instruments and hedging arrangements is uncertain,
which could hinder our ability to maintain effective hedges and could adversely impact our business operations and financial
results.
Our floating-rate debt and certain hedging transactions determine the applicable interest rate or payment amount by reference to
a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to another financial metric. Our existing hedging
arrangements currently use LIBOR as a reference rate, as calculated for U.S. dollar (“USD-LIBOR”). As of December 31, 2019,
we had approximately $0.5 billion of debt outstanding that was indexed to LIBOR. In the event any such benchmark rate or other
referenced financial metric is significantly changed, replaced or discontinued, or ceases to be recognized as an acceptable market
benchmark rate or financial metric, there may be uncertainty or differences in the calculation of the applicable interest rate or
payment amount depending on the terms of the governing instrument, and there may be significant work required to transition to
any new benchmark rate or other financial metric.
In July 2017, the United Kingdom regulator that regulates LIBOR announced its intention to phase out LIBOR rates by the end
of 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after
2021. In response to concerns regarding the reliability and robustness of commonly used reference rates, in particular LIBOR, the
Financial Stability Oversight Council and Financial Stability Board called for the development of alternative interest rate
benchmarks.
In April 2018, the New York Federal Reserve commenced publishing an alternative reference rate to LIBOR, as calculated for the
U.S. dollar (“USD-LIBOR”), the Secured Overnight Financing Rate (“SOFR”), proposed by a group of major market participants
convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators, the Alternative Reference Rates
Committee ("ARRC"). SOFR is based on transactions in the more robust U.S. Treasury repurchase market and has been proposed
as the alternative to USD-LIBOR for use in derivatives and other financial contracts that currently rely on USD-LIBOR as a
reference rate. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently
working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.
At this time, no consensus exists as to what rate or rates may become accepted alternatives to USD-LIBOR, and it is impossible
to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether
LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be
enacted in the United Kingdom or elsewhere. Furthermore, the transition from LIBOR to one or more replacement rates could
cause uncertainty in what reference rates apply to existing arrangements. The transition from USD-LIBOR to SOFR or any other
replacement rate adopted is likely to cause uncertainty related to interest rate costs.
Additionally, there is some possibility that LIBOR continues to be published, but that the quantity of loans used to calculate LIBOR
diminishes significantly enough to reduce the appropriateness of the rate as a reference rate. If a published USD-LIBOR is
unavailable after 2021, the interest rates for our debt instruments that are indexed to USD-LIBOR will be determined using various
alternative methods, any of which may result in interest obligations that are more than or do not otherwise correlate over time
with the payments that would have been made on such debt if USD-LIBOR remained available.
We can provide no assurance regarding the future of LIBOR, whether our current hedging arrangements will continue to use USD-
LIBOR as a reference rate or whether any reliance on such rate will be appropriate. Confusion as to the relevant benchmark
reference rate for our hedging instruments could hinder our ability to establish effective hedges.
Despite progress made to date by regulators and industry participants to prepare for the anticipated discontinuation of LIBOR,
significant uncertainties still remain. Such uncertainties relate to, for example, whether LIBOR will continue to be viewed as an
acceptable market benchmark rate, what rate or rates may become accepted alternatives to LIBOR (various characteristics of
SOFR make it uncertain whether it would be viewed by market participants as an appropriate alternative to USD-LIBOR for
certain purposes), how any replacement would be implemented across the industry, and the effect of any changes in industry views
or movement to alternative benchmarks would have on the markets for LIBOR-linked financial instruments.
We can provide no assurance regarding the future of LIBOR and when our current floating rate debt instruments and hedging
arrangements will transition from LIBOR as a reference rate to SOFR (in the case of our floating rate debt instruments and hedging
arrangements that determine the applicable interest rate or payment amount by reference to LIBOR-USD as a reference rate) or
another reference rate. The discontinuation of a benchmark rate or other financial metric, changes in a benchmark rate or other
financial metric, or changes in market perceptions of the acceptability of a benchmark rate or other financial metric, including
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LIBOR, could, among other things result in increased interest payments, changes to our risk exposures, or require renegotiation
of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market
volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with contract
negotiations. In addition, confusion related to the transition from USD-LIBOR to SOFR or another replacement reference rate
for our floating debt and hedging instruments could have an uncertain economic effect on these instruments, hinder our ability to
establish effective hedges and result in a different economic value over time for these instruments than they otherwise would have
had under USD-LIBOR.
Disruptions in the financial markets could affect our ability to obtain financing or have other adverse effects on us or the
market price of our common shares.
In recent years, the United States and global equity and credit markets have experienced significant price volatility and liquidity
disruptions which caused the market prices of shares to fluctuate substantially and the spreads on prospective debt financings to
widen considerably. These circumstances significantly and negatively impacted liquidity in the financial markets, making terms
for certain financings less attractive or unavailable. Any disruption in the equity and credit markets could negatively impact our
ability to access additional financing at reasonable terms or at all. If such disruption were to occur, in the event of a debt financing,
our cost of borrowing in the future would likely be significantly higher than historical levels. Additionally, in the case of a common
equity financing, the disruptions in the financial markets could have a material adverse effect on the market value of our common
shares, potentially requiring us to issue more shares than we would otherwise have issued with a higher market value for our
common shares. Disruption in the financial markets also could negatively affect our ability to make acquisitions, undertake new
development projects and refinance our debt. In addition, it could also make it more difficult for us to sell properties and could
adversely affect the price we receive for properties that we do sell, as prospective buyers experience increased costs of financing
and difficulties in obtaining financing. If economic conditions deteriorate, the ability of lenders to fulfill their obligations under
working capital or other credit facilities that we may have in the future may be adversely impacted.
Disruptions in the financial markets also could adversely affect many of our tenants and their businesses, including their ability
to pay rents when due and renew their leases at rates at least as favorable as their current rates. As well, our ability to attract
prospective new tenants in the future could be adversely affected by disruption in the financial markets. Each of these disruptions
could have adverse effects on us or the market price of our common shares.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness
secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any
loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall
value of our portfolio of properties (or portions thereof). For tax purposes, a foreclosure of any of our properties that is subject to
a nonrecourse mortgage loan generally would be treated as a sale of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis
in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder
our ability to satisfy the distribution requirements applicable to REITs under the Code.
Covenants in our debt agreements could adversely affect our financial condition.
Our credit facility contains customary restrictions, requirements and other limitations on our ability to incur indebtedness. We
must maintain certain ratios, including a maximum of total indebtedness to total asset value, a maximum of secured indebtedness
to total asset value, a minimum of quarterly adjusted EBITDA to fixed charges, a minimum net operating income from
unencumbered properties to unsecured interest expense and a maximum of unsecured indebtedness to unencumbered asset value.
Our ability to borrow under our credit facility is subject to compliance with our financial and other covenants.
Failure to comply with any of the covenants under our unsecured credit facility or other debt instruments could result in a default
under one or more of our debt instruments. In particular, we could suffer a default under our secured debt instrument that could
exceed a cross-default threshold under our unsecured credit facility, causing an event of default under the unsecured credit facility.
Under those circumstances, other sources of capital may not be available to us or be available only on unattractive terms. In
addition, if we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, take possession
of the property securing the defaulted loan.
Alternatively, even if a secured debt instrument is below the cross-default threshold for non-recourse secured debt under our
unsecured credit facility, a default under such secured debt instrument may still cause a cross default under our unsecured credit
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facility because such secured debt instrument may not qualify as “non-recourse” under the definition in our unsecured credit
facility. Another possible cross default could occur between our unsecured credit facility and any senior unsecured notes that we
issue. Any of the foregoing default or cross-default events could cause our lenders to accelerate the timing of payments and/or
prohibit future borrowings, either of which would have a material adverse effect on our business, operations, financial condition
and liquidity.
Risks Related to Our Organizational Structure
Our charter and Maryland law contain provisions that may delay, defer or prevent a change in control of WashREIT, even if
such a change in control may be in the best interest of our shareholders, and as a result may depress the market price of our
common shares.
Provisions of the Maryland General Corporation Law ("MGCL") may limit a change in control which could prevent holders of
our common shares from profiting as a result of such change in control. These provisions include:
•
•
a provision where a corporation is not permitted to engage in any business combination with any “interested
stockholder,” defined as any holder or affiliate of any holder of 10% or more of the corporation’s stock, for a period
of five years after that holder becomes an “interested stockholder,” and
a provision where the voting rights of “control shares” acquired in a “control share acquisition,” as defined in the
MGCL, may be restricted, such that the “control shares” have no voting rights, except to the extent approved by a
vote of holders of two-thirds of the common shares entitled to vote on the matter.
Our bylaws currently provide that the foregoing provision regarding "control share acquisitions" will not apply to WashREIT.
However, our board of trustees could, in the future, modify our bylaws such that the foregoing provision regarding "control share
acquisitions" would be applicable to WashREIT.
Additionally, Title 8, Subtitle 3 of the MGCL permits our board of trustees, without shareholder approval and regardless of what
is currently provided in our declaration of trust or bylaws, to implement certain takeover defenses. These provisions may have the
effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in
control of us under the circumstances that otherwise could provide our common shareholders with the opportunity to realize a
premium over the then current market price.
The stock ownership limits imposed by the Code for REITs and imposed by our charter may restrict our business combination
opportunities that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.
In order for us to maintain our qualification as a REIT under the Code, not more than 50% of the value of the outstanding shares
of all classes and series ("equity shares") may be owned, directly or indirectly, by five or fewer individuals (defined in the Code
to include certain entities) at any time during the last half of each taxable year following our first year. Our charter authorizes our
board of trustees to take the actions that are necessary or appropriate to preserve our qualification as a REIT. Our charter provides
that no person (other than an excepted holder, as defined in our charter) may actually or constructively own more than 9.8% of
the aggregate of our outstanding common shares by value or by number of shares, whichever is more restrictive, or 9.8% of the
aggregate of the equity shares by value.
Our board of trustees may, in its sole discretion, grant exemptions to the share ownership limits, subject to such conditions and
the receipt by our board of trustees of certain representations and undertakings. In addition, our board of trustees has the authority
under our charter to reduce these share ownership limits.
In addition to the share ownership limits discussed above, our charter also prohibits any person from (a) beneficially or
constructively owning, as determined by applying certain attribution rules of the Code, our equity shares that would result in us
being “closely held” under Section 856(h) of the Code (regardless of whether the interest is held during the last half of a taxable
year) or that would otherwise cause us to fail to qualify as a REIT, or (b) transferring equity shares if such transfer would result
in our equity shares being owned by fewer than 100 persons. The share ownership limits contained in our charter are based on the
ownership at any time by any “person,” which term includes entities and certain groups. The share ownership limitations in our
charter are common in REIT charters and are intended to provide added assurance of compliance with the tax law requirements,
and to minimize administrative burdens. However, the share ownership limits on our shares also might delay, defer, prevent, or
otherwise inhibit a transaction or a change in control of WashREIT that might involve a premium price for our common shares or
otherwise be in the best interest of our shareholders.
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Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit
your recourse in the event of actions that you do not believe are in your best interests.
Maryland law provides that a trustee has no liability in that capacity if he or she satisfies his or her duties to us and our shareholders.
Under current Maryland law, our trustees and officers will not have any liability to us or our shareholders for money damages,
except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material
to the cause of action adjudicated.
In addition, our charter authorizes and our bylaws require us to indemnify our trustees for actions taken by them in those capacities
to the maximum extent permitted by Maryland law. Our bylaws also authorize us to indemnify our officers for actions taken by
them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our shareholders may have more
limited rights against our trustees and officers than might otherwise exist. Accordingly, in the event that actions taken in good
faith by any of our trustees or officers impede the performance of WashREIT, your ability to recover damages from such trustees
or officers will be limited with respect to trustees and may be limited with respect to officers. In addition, we will be obligated to
advance the defense costs incurred by our trustees and our executive officers, and may, in the discretion of our board of trustees,
advance the defense costs incurred by our officers, our employees and other agents, in connection with legal proceedings.
Risks Related to Our Common Shares
We cannot assure you we will continue to pay dividends at current rates.
Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from
operations were to decline significantly, we may have to borrow on our lines of credit to sustain the dividend rate or reduce our
dividend. Our ability to continue to pay dividends on our common shares at their current rate or to increase our common share
dividend rate will depend on a number of factors, including, among others, the following:
•
•
•
•
•
our future financial condition and results of operations;
real estate market conditions in the Washington metro region;
the performance of lease terms by tenants;
the terms of our loan covenants; and
our ability to acquire, finance, develop or redevelop and lease additional properties at attractive rates.
Our board of trustees considers, among other factors, trends in our levels of funds from operations, together with associated
recurring capital improvements, tenant improvements, leasing commissions and incentives, and adjustments to straight-line rents
to reflect cash rents received. If some or all of these factors were to trend downward for a sustained period of time, our board of
trustees could determine to reduce our dividend rate. If we do not maintain or increase the dividend rate on our common shares
in the future, it could have an adverse effect on the market price of our common shares.
The market value of our securities can be adversely affected by many factors.
As with any public company, a number of factors may adversely influence the public market price of our common shares. These
factors include:
•
•
•
•
•
•
•
•
•
•
level of institutional interest in us;
perceived attractiveness of investment in us, in comparison to other REITs;
perceived attractiveness of the Washington metro region, particularly if investors have a negative sentiment about
the impact of election results on the region's economy;
attractiveness of securities of REITs in comparison to other asset classes taking into account, among other things,
that a substantial portion of REITs’ dividends may be taxed as ordinary income;
our financial condition and performance;
the market’s perception of our growth potential and potential future cash dividends;
investor confidence in the stock and bond markets generally;
national economic conditions and general stock and bond market conditions;
government uncertainty, action or regulation, including changes in tax law;
increases in market interest rates, which may lead investors to expect a higher annual yield from our distributions
in relation to the price of our shares;
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•
•
•
changes in U.S. federal tax laws;
changes in our credit ratings; and
any negative change in the level of our dividend or the partial payment thereof in common shares.
Risks Related to our Status as a REIT
The loss of our tax status as a REIT would have significant adverse consequences to us and the value of our common shares.
We believe that we qualify as a REIT and intend to continue to operate in a manner that will allow us to continue to qualify as a
REIT. However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future. This is
because qualification as a REIT involves the application of highly technical and complex provisions of the Code which include:
generating specified minimum levels of real estate-related income;
• maintaining ownership of specified minimum levels of real estate-related assets;
•
• maintaining certain diversity of ownership requirements with respect to our shares; and
•
distributing at least 90% of our "REIT taxable income" (determined before the deduction for dividends paid and
excluding net capital gains) on an annual basis.
The distribution requirement noted above could adversely affect our ability to use earnings for improvements or acquisitions
because funds distributed to shareholders will not be available for capital improvements to existing properties or for acquiring
additional properties.
Only limited judicial and administrative interpretations of the REIT rules exist. In addition, qualification as a REIT involves the
determination of various factual matters and circumstances not entirely within our control. Future legislation, new regulations,
administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with
respect to qualification as a REIT for U.S. federal income tax purposes or the U.S. federal income tax consequences of such
qualification. For example, the Tax Cuts and Jobs Act (the “TCJA”), which was signed into law on December 22, 2017 and which
generally took effect for taxable years beginning on or after January 1, 2018, made fundamental changes to the U.S. federal income
tax laws applicable to businesses and their owners, including REITs and their shareholders.
If we fail to qualify as a REIT, we could face serious tax consequences that could substantially reduce our funds available for
payment of dividends for each of the years involved because:
• we would be subject to U.S. federal income tax at the regular corporate rate (currently 21%), without any deduction
for dividends paid to shareholders in computing our taxable income, and possibly increased state and local taxes;
and
•
unless we are entitled to relief under statutory provisions, we would be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost.
This treatment would reduce net earnings available for investment or distribution to shareholders because of the additional tax
liability for the year (or years) involved. To the extent that distributions to shareholders had been made based on the assumption
of our qualification as a REIT, we might be required to borrow funds or to liquidate certain of our investments to pay the
applicable tax. As a result of these factors, our failure to qualify as a REIT could have a material adverse impact on our results
of operations, financial condition and liquidity. If we fail to qualify as a REIT but are eligible for certain relief provisions, then
we may retain our status as a REIT but may be required to pay a penalty tax, which could be substantial.
Complying with the REIT requirements may cause us to forego and/or liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually. In addition, we must ensure that, at the
end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government securities and
qualifying real estate assets, including certain mortgage loans (the "75% asset test"). The remainder of our investment in securities
(other than government securities, securities treated as real estate assets and securities issued by a TRS) generally cannot include
more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding
securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities,
securities treated as real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more
than 20% of the value of our total securities can be represented by securities of one or more TRSs. We can treat debt instruments
issued by publicly offered REITs, to the extent not secured by real property or interests in real property, as "real estate assets" for
purposes of the 75% test (and, thus, not subject to the 10% and 5% asset tests), but the total value of such debt instruments cannot
23
exceed 25% of the value of our total assets. If we fail to comply with these asset requirements at the end of any calendar quarter,
we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to
avoid losing our REIT qualification and suffering adverse tax consequences.
To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider advantageous. For
example, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to forego
investments that we otherwise would make. Furthermore, we may be required to liquidate from our portfolio (or to contribute to
a TRS) otherwise attractive investments. In addition, we may be required to make distributions to shareholders at disadvantageous
times or when we do not have funds readily available for distribution. These actions could have the effect of reducing our income
and amounts available for distribution to our shareholders. Thus, compliance with the REIT requirements may hinder our ability
to make, or, in certain cases, maintain ownership of, certain attractive investments.
The requirements necessary to maintain our REIT status limit our ability to earn fee income at the REIT level, which causes
us to conduct certain fee-generating activities through TRSs.
The REIT provisions of the Code limit our ability to earn fee income from joint ventures and third parties. Our aggregate gross
income from fees and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, our ability
to increase the amount of fee income we earn at the REIT level is limited and, therefore, we conduct certain fee-generating activities
through a TRS. Any fee income we earn through TRSs is subject to U.S. federal, state, and local income tax at the regular corporate
rates (currently 21% for federal), which reduces our cash available for distribution to shareholders.
Our ability to own stock and securities of TRSs is limited and our transactions with our TRSs will cause us to be subject to a
100% penalty tax on certain income or deductions if those transactions are not conducted on arm's-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be
qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or
securities of one or more TRSs. In addition, the rules applicable to TRSs limit the deductibility of interest paid or accrued by a
TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a
100% excise tax on the parent REIT with respect to certain transactions involving a TRS that are not conducted on an arm's-length
basis.
Our TRSs will pay U.S. federal, state and local income tax on their taxable income. The after-tax net income of our TRSs will be
available for distribution to us but generally is not required to be distributed. We believe that the aggregate value of the stock and
securities of our TRSs is less than 20% of the value of our total assets (including the stock and securities of our TRSs). Furthermore,
we monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with the ownership
limitations applicable to TRSs. We scrutinize all of our transactions involving our TRSs to ensure that they are entered into on
arm's-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be
able to comply with the 20% limitation discussed above or avoid application of the 100% excise tax discussed above.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Any income from a hedging transaction
that we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry
real estate assets, or manage the risk of certain currency fluctuations, does not constitute "gross income" for purposes of the 75%
or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. As a result of these rules,
we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a
TRS. This could increase the cost of our hedging activities because a TRS would be subject to tax on gains or expose us to greater
risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally
not provide any current tax benefit, except to the extent that they may be carried back to prior years or forward to future years and
offset against taxable income in the TRSs, provided, however, losses in TRSs arising in taxable years beginning after December
31, 2017, may only be carried forward and may only be deducted against 80% of future taxable income in the TRSs.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from "qualified dividends" payable by non-REIT C corporations to U.S. shareholders
that are individuals, trusts or estates generally is 20% (excluding the 3.8% net investment income tax). Dividends payable by
REITs, however, generally are not eligible for the maximum 20% reduced rate and are taxed at applicable ordinary income tax
24
rates, except to the extent that certain holding requirements have been met and a REIT's dividends are attributable to dividends
received by a REIT from taxable corporations (such as a TRS), to income that was subject to tax at the REIT/corporate level, or
to dividends properly designated by the REIT as “capital gain dividends.” Effective for taxable years beginning after December
31, 2017 and before January 1, 2026, those U.S. shareholders that are individuals, trusts or estates may deduct 20% of their
dividends from REITs (excluding qualified dividend income and capital gains dividends). For those U.S. shareholders in the top
marginal tax bracket of 37%, the deduction for REIT dividends yields an effective income tax rate of 29.6% (exclusive of the net
investment income tax) on REIT dividends, which is higher than the 20% tax rate on qualified dividend income paid by non-REIT
C corporations (although the maximum effective rate applicable to such dividends, after taking into account the 21% U.S. federal
income tax rate applicable to non-REIT C corporations is 36.8% (exclusive of the 3.8% net investment income tax)). Although
the reduced rates applicable to dividend income from non-REIT C corporations do not adversely affect the taxation of REITs or
dividends payable by REITs, these reduced rates could cause investors who are non-corporate taxpayers to perceive investments
in REITs to be relatively less attractive than investments in the shares of non-REIT C corporations that pay dividends, which could
adversely affect the value of the stock of REITs, including our common shares.
Gains from sales of properties are potentially subject to the "prohibited transactions" tax or corporate-level income tax and
could require us to make additional distributions to our shareholders that would reduce our capital available for investment
in other properties or require us to obtain additional funds to pay such taxes or make such distributions.
A REIT's net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales
or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of
business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary
course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual
determination and no guarantee can be given that the Internal Revenue Service ("IRS") would agree with our characterization of
our properties or that we will be able to make use of the otherwise available safe harbors. In addition, the sale of properties may
generate gains for tax purposes which, if not adequately deferred through “like-kind exchanges” under Section 1031 of the Code
("Section 1031 Exchanges"), could require us to pay more taxes or make additional distributions to our shareholders, thus reducing
our capital available for investment in other properties, or if the proceeds of such sales are already invested in other properties,
require us to obtain additional funds to pay such taxes or make such distributions. From time to time, we dispose of properties in
transactions intended to qualify as Section 1031 Exchanges. Intermediary agents of Section 1031 Exchanges typically handle large
sums of money in trust. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully
challenged and determined to be currently taxable. In such case, our taxable income and earnings and profits would increase. This
could increase the dividend income to our shareholders by reducing any return of capital they received. In some circumstances,
we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties.
As a result, we may be required to borrow funds in order to pay additional dividends or taxes, and the payment of such taxes could
cause us to have less cash available to distribute to our shareholders. In addition, if a Section 1031 Exchange were later to be
determined to be taxable, we may be required to amend our tax returns for the applicable year in question, including any information
reports we sent our shareholders. Moreover, it is possible that legislation could be enacted that could modify or repeal the laws
with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of properties on a
tax deferred basis.
The REIT distribution requirements could require us to borrow funds during unfavorable market conditions or subject us to
tax, which would reduce the cash available for distribution to our shareholders.
In order to qualify as a REIT, we generally must distribute to our shareholders, on an annual basis, at least 90% of our "REIT
taxable income," determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we
will be subject to U.S. federal income tax at the regular corporate rate (currently 21%) to the extent that we distribute less than
100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount
by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws.
We intend to continue to distribute our net income to our shareholders in a manner intended to satisfy the REIT 90% distribution
requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax.
In addition, from time to time our taxable income may exceed our net income as determined by GAAP. This may occur, for instance,
because realized capital losses are deducted in determining our GAAP net income, but may not be deductible in computing our
taxable income. In addition, we may incur nondeductible capital expenditures or be required to make debt or amortization payments.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and we may incur U.S. federal
income tax and the 4% nondeductible excise tax on that income if we do not distribute such income to shareholders in that year.
In that event, we may be required to (i) use cash reserves, (ii) incur debt at rates or times that we regard as unfavorable, (iii) sell
assets in adverse market conditions, (iv) distribute amounts that would otherwise be invested in future acquisitions, capital
expenditures or repayment of debt, or (v) make a taxable distribution of our shares as part of a distribution in which shareholders
25
may elect to receive our shares or (subject to a limit measured as a percentage of the total distribution) cash in order to satisfy the
REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year. These
alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability
to grow, which could adversely affect our business, financial condition and results of operations.
The ability of our board of trustees to revoke our REIT qualification without shareholder approval may cause adverse
consequences to our shareholders.
Our charter provides that our board of trustees may revoke or otherwise terminate our REIT election, without the approval of our
shareholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we
will not be allowed a deduction for dividends paid to shareholders in computing our taxable income, will be subject to U.S. federal,
state and local income tax at the regular corporate rates (currently 21% for federal), and generally would no longer be required to
distribute any of our net taxable income to our shareholders, which may have adverse consequences on our total return to our
shareholders.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income, property
or net worth, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure,
and state or local income, property and transfer taxes. Moreover, if we have net income from "prohibited transactions," that income
will be subject to a 100% tax. The need to avoid prohibited transactions could cause us to forego or defer sales of properties that
might otherwise be in our best interest to sell. In addition, we could, in certain circumstances, be required to pay an excise or
penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our
qualification as a REIT. Any of these taxes would decrease cash available for the payment of our debt obligations and distributions
to shareholders. Our TRSs generally will be subject to U.S. federal, state and local corporate income tax on their net taxable
income.
Legislative changes to our ability to deduct for tax purposes compensation paid to our executives could require us to increase
our distributions to stockholders in order to maintain REIT status or to avoid entity-level taxes.
Section 162(m) of the Code prohibits publicly held corporations from taking a tax deduction for annual compensation in excess
of $1 million paid to any of the corporation’s “covered employees.” Prior to the enactment of the TCJA, a publicly held corporation’s
covered employees included its chief executive officer and the three other most highly compensated executive officers (other than
the chief financial officer), and certain “performance-based compensation” was excluded from the $1 million cap. The TCJA made
certain changes to Section 162(m), effective for taxable years beginning after December 31, 2017. These changes included, among
others, expanding the definition of “covered employee” to include the chief financial officer and repealing the performance-based
compensation exception to the $1 million cap, subject to a transition rule for remuneration provided pursuant to a written binding
contract which was in effect on November 2, 2017, and which was not modified in any material respect on or after that date.
Since we qualify as a REIT under the Code and we are generally not subject to U.S. federal income taxes, if compensation did
not qualify for deduction under Section 162(m), the payment of compensation that fails to satisfy the requirements of Section
162(m) would not have a material adverse consequence to us, provided we continue to distribute 100% of our taxable income.
Based on our current taxable income and distributions, we do not believe that we will be required to increase our rate of distributions
in order to maintain our status as a REIT (or to avoid paying corporate or excise taxes at the entity level) if a portion of our payment
of compensation fails to satisfy the requirements of Section 162(m). However, in that case, a larger portion of shareholder
distributions that would otherwise have been treated as a return of capital will be subject to U.S. federal income tax as dividend
income. In the future, if we make compensation payments subject to Section 162(m) limitations on deductibility, we may be
required to make additional distributions to shareholders to comply with REIT distribution requirements and eliminate U.S. federal
income tax liability at the entity level. Any such compensation allocated to our TRSs whose income is subject to U.S. federal
income tax would result in an increase in income taxes due to the inability to deduct such compensation.
There is a risk of changes in the tax law applicable to REITs which may adversely affect our taxation as a REIT and taxation
of our shareholders.
The IRS, the United States Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations
and other guidance. We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or
rulings will be adopted. Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may
adversely affect our taxation or taxation of our shareholders. We urge you to consult with your tax advisor with respect to the
status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our
26
shares. Although REITs generally receive certain tax advantages compared to entities taxed as C corporations, it is possible that
future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company
that invests in real estate to elect to be treated for U.S. federal income tax purposes as a C corporation.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
27
ITEM 2: PROPERTIES
The schedule on the following pages lists our real estate investment portfolio as of December 31, 2019, which consisted of 45
properties and land held for development.
As of December 31, 2019, the percent leased is (i) for commercial properties, the percentage of net rentable area for which fully
executed leases exist and may include signed leases for space not yet occupied by the tenant, and (ii) for multifamily properties,
the percentage of units leased. Cost information is included in Schedule III to our financial statements included in this Annual
Report on Form 10-K.
Schedule of Properties
Year
Acquired
Year
Constructed/
Renovated
# of Units
Net Rentable
Square Feet
Percent
Leased, as of
December 31,
2019 (1)
Ending
Occupancy, as
of December 31,
2019 (1)
Properties
Location
Multifamily Buildings
3801 Connecticut Avenue
Washington, DC
Roosevelt Towers
Falls Church, VA
Park Adams
The Ashby at McLean
Arlington, VA
McLean, VA
Bethesda Hill Apartments
Bethesda, MD
Bennett Park
Clayborne
Arlington, VA
Alexandria, VA
Kenmore Apartments
Washington, DC
The Paramount
Yale West (2)
The Maxwell
The Wellington
Arlington, VA
Washington, DC
Arlington, VA
Arlington, VA
Riverside Apartments
Alexandria, VA
Assembly Alexandria
Alexandria, VA
Assembly Manassas
Assembly Dulles
Assembly Leesburg
Assembly Herndon
Manassas, VA
Herndon, VA
Leesburg, VA
Herndon, VA
Assembly Germantown
Germantown, MD
Assembly Watkins Mill
Gaithersburg, MD
Cascade at Landmark
Alexandria, VA
1963
1965
1969
1996
1997
2001
2003
2008
2013
2014
2011
2015
2016
2019
2019
2019
2019
2019
2019
2019
2019
1951
1964
1959
1982
1986
2007
2008
1948
1984
2011
2014
1960
1971
1990
1986
2000
1986
1991
1990
1975
1988
307
191
200
256
195
224
74
374
135
216
163
711
178,000
170,000
173,000
274,000
225,000
215,000
60,000
268,000
141,000
173,000
116,000
600,000
1,222
1,001,000
532
408
328
134
283
218
210
277
437,000
390,000
361,000
124,000
221,000
211,000
193,000
273,000
96.4%
96.3%
97.0%
96.1%
97.9%
95.5%
97.3%
94.9%
97.8%
98.1%
98.8%
96.2%
97.1%
95.3%
94.9%
96.0%
94.8%
96.1%
95.4%
97.1%
96.4%
96.4%
95.4%
94.8%
95.0%
94.5%
92.8%
95.1%
97.3%
93.6%
97.0%
97.2%
97.5%
93.4%
95.7%
94.9%
94.4%
95.1%
94.0%
95.1%
95.0%
94.8%
94.2%
94.9%
Subtotal
6,658
5,804,000
______________________________
(1)
(2)
Leased percentage and ending occupancy calculations are based on units for multifamily buildings.
At December 31, 2019, Yale West was encumbered by a non-recourse mortgage in the amount of $45.7 million. Mortgage amount excludes premiums and
debt loan costs. This mortgage was repaid on January 31, 2020 (see note 5 to the consolidated financial statements).
28
Properties
Location
Year
Acquired
Year Constructed/
Renovated
Net Rentable
Square Feet
Percent
Leased, as of
December 31,
2019 (3)
Ending
Occupancy, as
of December 31,
2019 (3)
Office Buildings
1901 Pennsylvania Avenue
Washington, DC
515 King Street
1220 19th Street
Alexandria, VA
Washington, DC
1600 Wilson Boulevard
Arlington, VA
Silverline Center
Courthouse Square
Monument II
2000 M Street (4)
Tysons, VA
Alexandria, VA
Herndon, VA
Washington, DC
1140 Connecticut Avenue
Washington, DC
1227 25th Street
John Marshall II
Fairgate at Ballston
Army Navy Building
1775 Eye Street, NW
Watergate 600
Arlington Tower
Subtotal
Retail Centers
Takoma Park
Westminster
Concord Centre
Washington, DC
Tysons, VA
Arlington, VA
Washington, DC
Washington, DC
Washington, DC
Arlington, VA
Takoma Park, MD
Westminster, MD
Springfield, VA
Chevy Chase Metro Plaza
Washington, DC
1977
1992
1995
1997
1997
2000
2007
2007
2011
2011
2011
2012
2014
2014
2017
2018
1963
1972
1973
1985
1960
1966
1976
1973
1972/2015
1979
2000
1971
1966
1988
1996/2010
1988
1912/1987/2017
1964
1972/1997
1980/2014
1962
1969
1960
1975
800 S. Washington Street
Alexandria, VA
1998/2003
1955/1959
Randolph Shopping Center
Rockville, MD
Montrose Shopping Center
Rockville, MD
Spring Valley Village
Washington, DC
2006
2006
2014
1972
1970
1941/1950/2018
Subtotal
TOTAL
101,000
75,000
103,000
170,000
549,000
120,000
209,000
232,000
184,000
135,000
223,000
145,000
108,000
189,000
293,000
391,000
3,227,000
51,000
150,000
75,000
49,000
46,000
83,000
149,000
92,000
695,000
9,726,000
85.6%
86.5%
73.4%
90.8%
96.0%
82.9%
95.1%
91.8%
92.2%
93.5%
100.0%
82.3%
100.0%
93.7%
91.9%
90.6%
91.9%
85.6%
86.5%
61.7%
89.5%
94.0%
82.9%
95.1%
91.0%
92.2%
86.2%
100.0%
77.2%
100.0%
93.7%
81.2%
90.6%
89.6%
100.0%
100.0%
95.0%
93.2%
90.2%
89.6%
86.4%
94.0%
92.0%
92.8%
95.0%
93.2%
90.2%
87.0%
86.4%
94.0%
79.1%
90.9%
______________________________
(3)
(4)
Percent leased and ending occupancy calculations are based on square feet that includes temporary lease agreements for commercial properties.
This property is subject to a ground lease which expires on October 6, 2070.
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: MINE SAFETY DISCLOSURES
None.
29
PART II
ITEM 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market and Shareholder Information: Our shares trade on the New York Stock Exchange under the symbol WRE. As of February 13,
2020, there are 3,385 shareholders of record.
Issuer Repurchases; Unregistered Sales of Securities: A summary of our repurchases of shares of our common stock for the three
months ended December 31, 2019 was as follows:
Period
October 1 - October 31, 2019
November 1 - November 30, 2019
December 1 - December 31, 2019
Total
Issuer Purchases of Equity Securities
Total Number of
Shares Purchased (1)
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or
Programs
Maximum Number (or
Approximate Dollar Value) of
Shares that May Yet be
Purchased
— $
—
25,494
25,494
—
—
29.18
29.18
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
______________________________
(1)
Represents restricted shares surrendered by employees to WashREIT to satisfy such employees' applicable statutory minimum tax withholding obligations
in connection with the vesting of restricted shares.
Performance Graph:
The following line graph sets forth, for the period from December 31, 2014, through December 31, 2019, a comparison of the
percentage change in the cumulative total stockholder return on our common stock compared to the cumulative total return of the
Standard & Poor's 500 Stock Index and the MSCI US REIT Index. The graph assumes that $100 was invested on December 31,
2014, in shares of our common stock and each of the aforementioned indices and that all dividends were reinvested without the
payment of any commissions. There can be no assurance that the performance of our shares will continue in line with the same
or similar trends depicted in the graph below.
This performance graph shall not be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, or
incorporated by reference into any filing by us under the Securities Act of 1933, except as shall be expressly set forth by specific
reference in such filing.
30
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth our selected financial data on a historical basis. The following data should be read in conjunction
with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this Form 10-K.
2019
2018
2017
2016
2015
Real estate rental revenue
Income (loss) from continuing operations
Discontinued operations:
Income from operations of properties sold or held for
sale
Gain on sale of real estate
Net income
Net income attributable to the controlling interests
Income (loss) from continuing operations attributable to the
controlling interests per share – diluted
Net income attributable to the controlling interests per
share – diluted
$
$
$
$
$
$
$
$
309,180
29,132
16,158
339,024
383,550
383,550
0.36
4.75
$
$
$
$
$
$
$
$
(in thousands, except per share data)
291,730
1,153
$
$
280,281
$
268,672
(3,568) $
96,261
$
$
262,695
66,528
24,477
$
23,180
$
23,027
$
22,659
— $
— $
— $
25,630
25,630
0.01
0.32
$
$
$
$
19,612
19,668
$
$
119,288
119,339
(0.05) $
0.25
$
1.33
1.65
$
$
$
$
—
89,187
89,740
0.97
1.31
Total assets
Amounts outstanding on line of credit
Mortgage notes payable, net
Notes payable, net
Shareholders’ equity
Cash dividends declared
Cash dividends declared per share
$ 2,628,328
$ 2,417,104
$ 2,359,426
$ 2,253,619
$ 2,191,168
$
$
$
56,000
47,074
996,722
$
$
$
188,000
48,277
995,397
$
$
$
166,000
81,624
894,358
$
$
$
120,000
133,117
843,084
$ 1,411,726
$ 1,068,127
$ 1,094,971
$ 1,050,946
$
$
96,964
1.20
$
$
95,502
1.20
$
$
92,834
1.20
$
$
87,570
1.20
$
$
$
$
$
$
105,000
400,813
743,181
835,649
82,003
1.20
31
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We provide Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the
accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial
condition. We organize the MD&A as follows:
• Overview. Discussion of our business outlook, operating results, investment activity, financing activity and capital requirements
to provide context for the remainder of MD&A.
Results of Operations. Discussion of our financial results comparing 2019 to 2018 and comparing 2018 to 2017.
Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and
cash flows.
•
• Funds From Operations. Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental
measure to net income.
• Critical Accounting Policies and Estimates. Descriptions of accounting policies that reflect significant judgments and estimates
used in the preparation of our consolidated financial statements.
When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators:
• Net operating income (“NOI”), calculated as set forth below under the caption "Results of Operations - Net Operating Income."
NOI is a non-GAAP supplemental measure to net income.
• Funds From Operations (“NAREIT FFO”), calculated as set forth below under the caption “Funds from Operations.” NAREIT
FFO is a non-GAAP supplemental measure to net income.
• Ending occupancy, calculated as occupied square footage as a percentage of total square footage as of the last day of that
period.
Leased percentage, calculated as the percentage of apartments leased for our multifamily properties and percentage of available
physical net rentable area leased for our commercial properties.
Leasing activity, including new leases, renewals and expirations.
•
•
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store”, “non-same-store” or
discontinued operations. Same-store properties include properties that were owned for the entirety of the years being compared, and
exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years
being compared. We define development properties as those for which we have planned or ongoing major construction activities on
existing or acquired land pursuant to an authorized development plan. We consider a property's development activities to be complete
when the property is ready for its intended use. The property is categorized as same-store when it has been ready for its intended use
for the entirety of the years being compared. We define redevelopment properties as those for which we have planned or ongoing
significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an
impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on
the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority
of each year being compared.
Overview
Operating Results
Net income attributable to the controlling interests, NOI and NAREIT FFO for the years ended December 31, 2019 and 2018 were as
follows (in thousands):
Year Ended December 31,
2019
2018
Change
% Change
383,550
193,600
134,118
$
$
$
25,630
186,138
146,249
$
$
$
357,920
7,462
(12,131)
1,396.5 %
4.0 %
(8.3)%
Net income attributable to the controlling interests
NOI (1)
NAREIT FFO (2)
______________________________
(1) See pages 34 and 38 of the MD&A for reconciliations of NOI to net income.
(2) See page 47 of the MD&A for reconciliations of NAREIT FFO to net income.
$
$
$
32
The increase in net income attributable to the controlling interests is primarily due to higher gains on sale of real estate ($396.5 million)
and higher NOI ($7.5 million), partially offset by higher depreciation and amortization expense ($24.4 million), lower income from
discontinued operations ($8.3 million), higher real estate impairment charges ($6.5 million), higher interest expense ($3.2 million),
higher general and administrative expenses ($2.3 million), and higher lease origination expenses ($1.7 million).
The higher NOI is primarily due to income from the multifamily acquisitions ($16.4 million), partially offset by the sales of 2445 M
Street ($5.3 million), Quantico Corporate Center ($1.7 million), 1776 G Street ($0.7 million) and Braddock Metro Center ($0.2 million),
and lower NOI from Arlington Tower ($0.7 million) and same-store properties ($0.3 million). The lower same-store NOI is explained
in further detail beginning on page 34 (Results of Operations - 2019 Compared to 2018).
The decrease in NAREIT FFO primarily reflects lower income from discontinued operations, net of depreciation and amortization
($12.8 million), higher interest expense ($3.2 million) and higher general and administrative ($2.3 million) and lease origination ($1.7
million) expenses, partially offset by higher NOI ($7.5 million) and lower losses on extinguishment of debt ($0.4 million).
Investment and Financing Activity
Significant investment and financing transactions during 2019 included the following:
• The disposition of Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings
totaling 272,000 square feet for a contract sales price of $33.0 million.
• The acquisition of the Assembly properties in Virginia and Maryland (collectively, the "Assembly Portfolio"), consisting of
seven multifamily properties with a total of 2,113 units, for a contract purchase price of $461.2 million. In connection with
the acquisition of these properties, we entered into a six-month, $450.0 million unsecured term loan facility (the “2019 Term
Loan”). We repaid this term loan during the third quarter of 2019 using proceeds from the sales of retail properties (see note
6 to the consolidated financial statements).
• The acquisition of Cascade at Landmark, a 277-unit multifamily property in Alexandria, Virginia, for a contract purchase
price of $69.8 million.
• The disposition of five retail shopping centers and three retail power centers in three separate transactions. We recognized an
aggregate gain on sale of real estate of $339.0 million from these transactions. Prior to closing on the disposition of the five
retail shopping centers (the "Shopping Center Portfolio"), we prepaid the mortgage note secured by Olney Village Center,
incurring a loss on extinguishment of debt of approximately $0.8 million.
• The disposition of 1776 G Street, a 262,000 square foot office property in Washington, DC, for a contract sale price of $129.5
million. We recognized a gain on sale of real estate of $61.0 million related to this transaction.
As of February 13, 2020, our Revolving Credit Facility has a borrowing capacity of $573.0 million. As of December 31, 2019, the
interest rate on the facility was LIBOR plus 1.0% and LIBOR was 1.7% as of that date.
Capital Requirements
In January 2020, we prepaid the $45.6 million mortgage note payable secured by Yale West, recognizing a gain on extinguishment of
debt of $0.5 million. Following this prepayment, we have no mortgage notes. Our $250.0 million of 4.95% 10-year unsecured notes
are scheduled to mature in October 2020, but may be prepaid without penalty beginning in April 2020. We expect to have additional
capital requirements as set forth on page 41 (Liquidity and Capital Resources - Capital Requirements).
Results of Operations
The discussion that follows is based on our consolidated results of operations for the three years ended December 31, 2019. The ability
to compare one period to another is significantly affected by acquisitions completed and dispositions made during those years (see note
3 to the consolidated financial statements).
Net Operating Income
NOI, defined as real estate rental revenue less real estate expenses, is a non-GAAP measure. NOI is calculated as net income, less non-
real estate revenue and the results of discontinued operations (including the gain on sale, if any), plus interest expense, depreciation
and amortization, general and administrative expenses, lease origination expenses, real estate impairment and gain or loss on
extinguishment of debt. We believe that NOI is useful as a performance measure because, when compared across periods, NOI reflects
the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective
not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely
33
related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a
real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort
operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated
in accordance with GAAP. NOI does not represent net income or income from continuing operations, in either case calculated in
accordance with GAAP. As such, it should not be considered an alternative to these measures as an indication of our operating
performance. A reconciliation of NOI to net income follows.
2019 Compared to 2018
The following tables reconcile NOI to net income attributable to the controlling interests and provide the basis for our discussion of
our consolidated results of operations and NOI in 2019 compared to 2018. All amounts are in thousands except percentage amounts.
Non-Same-Store
Same-Store
2019
2018
$
Change
%
Change
Acquisitions (1)
Development/
Redevelopment (2)
Held for Sale or
Sold (3)
All Properties
2019
2018
2019
2018
2019
2018
2019
2018
$
Change
%
Change
$ 234,946
$ 233,098
$ 1,848
0.8 % $ 50,259
$ 22,389
$
35
$ — $23,940
$36,243
$ 309,180
$ 291,730
$ 17,450
6.0 %
89,453
87,293
2,160
2.5 % 17,077
4,914
76
21
8,974
13,364
115,580
105,592
9,988
$ 145,493
$ 145,805
$
(312)
(0.2)% $ 33,182
$ 17,475
$
(41)
$
(21)
$14,966
$22,879
$ 193,600
$ 186,138
$
7,462
Real estate
rental revenue
Real estate
expenses
NOI
Reconciliation to net income attributable to the controlling interests:
Depreciation and amortization
General and administrative expenses
Lease origination expenses
Real estate impairment
Gain on sale of real estate
Interest expense
Loss on extinguishment of debt
Discontinued operations (4):
Income from properties sold or held for sale
Gain on sale of real estate
Loss on extinguishment of debt
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to the controlling interests
______________________________
(1)
Acquisitions:
2019 Multifamily – Assembly Portfolio and Cascade at Landmark
2018 Office – Arlington Tower
9.5 %
4.0 %
21.8 %
10.3 %
344.0 %
(136,253)
(111,826)
(24,427)
(24,370)
(22,089)
(1,698)
(8,374)
—
(1,886)
(2,281)
(1,698)
(6,488)
59,961
2,495
57,466
2,303.2 %
(53,734)
(50,501)
(3,233)
6.4 %
—
(1,178)
1,178
(100.0)%
16,158
24,477
(8,319)
(34.0)%
339,024
— 339,024
(764)
—
(764)
383,550
25,630
357,920
1,396.5 %
—
—
—
$ 383,550
$ 25,630
$357,920
1,396.5 %
(2)
(3)
(4)
Development/redevelopment properties:
Multifamily development property – The Trove and land adjacent to Riverside Apartments
Sold (classified as continuing operations):
2019 Office – Quantico Corporate Center and 1776 G Street
2018 Office – Braddock Metro Center and 2445 M Street
Held for sale (classified as continuing operations):
2019 Office – John Marshall II
Discontinued operations:
2019 Retail – Wheaton Park, Bradlee Shopping Center, Shoppes of Foxchase, Gateway Overlook, Olney Village Center, Frederick County Square, Centre at Hagerstown and Frederick
Crossing
Real Estate Rental Revenue
Real estate rental revenue is comprised of (a) minimum base rent, which includes rental revenues recognized on a straight-line basis,
(b) revenue from the recovery of operating expenses from our tenants, (c) credit losses on lease related receivables, (d) revenue
recognized from lease termination fees and (e) parking and other tenant charges such as percentage rents.
34
Real estate rental revenue from same-store properties for the two years ended December 31, 2019 was as follows (in thousands, except
percentage amounts):
Multifamily
Office
Other
Total same-store real estate rental revenue
Year Ended December 31,
2019
2018
$ Change
% Change
$
$
98,455
117,501
18,990
234,946
$
$
95,194
119,842
18,062
233,098
$
$
3,261
(2,341)
928
1,848
3.4 %
(2.0)%
5.1 %
0.8 %
• Multifamily: Increase primarily due to higher rental rates ($2.5 million), lower rent abatements ($0.3 million), higher recoveries
($0.3 million) and higher parking income ($0.2 million).
• Office: Decrease primarily due to lower rental income ($2.6 million) due to lease expirations at Watergate 600 and 1220 19th
Street and higher rent abatements ($1.1 million), partially offset by higher lease termination fees ($1.4 million).
Real estate rental revenue from acquisitions increased due to the acquisition of Assembly Portfolio ($24.9 million) and Cascade at
Landmark ($2.7 million) in 2019 and Arlington Tower ($0.2 million) in 2018.
Real estate rental revenue from held for sale or sold properties classified as continuing operations decreased due to the sale of 2445 M
Street ($8.7 million) during the second quarter of 2018, Quantico Corporate Center ($2.7 million) during the second quarter of 2019,
1776 G Street ($0.7 million) during fourth quarter of 2019 and Braddock Metro Center ($0.4 million) during the first quarter of 2018.
These were partially offset by higher real estate rental revenue at John Marshall II ($0.1 million).
Ending occupancy is calculated as occupied square footage indicated as a percentage of total square footage as of the last day of that
period. Ending occupancy for properties classified as continuing operations for the two years ended December 31, 2019 was as follows:
Segment
Multifamily
Office
Other
Total
December 31, 2019
December 31, 2018
Increase (decrease)
Same-Store
94.9%
88.5%
90.9%
92.1%
Non-Same-
Store
94.6%
94.0%
N/A
94.5%
Total
94.8%
89.6%
90.9%
92.8%
Same-Store
Non-Same-
Store
94.8%
93.6%
89.9%
93.9%
N/A
89.5%
N/A
89.5%
Total
94.8%
92.3%
89.9%
93.2%
Same-Store
0.1 %
(5.1)%
1.0 %
(1.8)%
Non-Same-
Store
Total
N/A
— %
4.5% (2.7)%
1.0 %
N/A
5.0% (0.4)%
• Multifamily: Increase in same-store ending occupancy was primarily due to higher ending occupancy at The Paramount, 3801
Connecticut Avenue and Roosevelt Towers, partially offset by lower ending occupancy at The Wellington.
• Office: Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 1220 19th Street, Watergate
600 and 1227 25th Street.
During 2019, we executed new and renewed leases in our office segment as follows:
Office
Square Feet
(in thousands)
Average Rental
Rate
(per square foot)
% Rental Rate
Increase
Leasing Costs (1)
(per square foot)
Free Rent
(weighted average
months)
414
$
51.10
17.6% $
96.69
6.4
______________________________
(1)
Consist of tenant improvements and leasing commissions.
35
Real Estate Expenses
Real estate expenses as a percentage of revenue for the two years ended December 31, 2019 were 37.4% and 36.2%, respectively.
Real estate expenses from same-store properties for the two years ended December 31, 2019 were as follows (in thousands):
Multifamily
Office
Other
Total same-store real estate expenses
Year Ended December 31,
2019
2018
$ Change
% Change
$
$
37,817
$
37,214
$
46,114
5,522
45,043
5,036
89,453
$
87,293
$
603
1,071
486
2,160
1.6%
2.4%
9.7%
2.5%
• Multifamily: Increase primarily due to higher contract maintenance ($0.3 million), administrative ($0.1 million), repairs and
maintenance ($0.1 million) and utility ($0.1 million) expenses.
• Office: Increase primarily due to higher real estate tax ($0.8 million) and administrative ($0.7 million) expenses, partially
offset by lower utilities expenses ($0.2 million).
Other Income and Expenses
Depreciation and Amortization: Increase primarily due to acquisitions of the Assembly Portfolio ($23.7 million) and Cascade at
Landmark ($2.9 million), higher depreciation and amortization at same-store properties ($1.7 million) and placing into service a portion
of the parking garage at The Trove development ($0.1 million) during 2019. These increases were partially offset by lower depreciation
and amortization at Arlington Tower ($1.6 million) and John Marshall II ($0.2 million) and the dispositions of Quantico Corporate
Center ($1.7 million), 2445 M Street ($0.4 million) and 1776 G Street ($0.1 million).
General and administrative expenses: Increase primarily due to higher incentive compensation expense ($1.8 million) and professional
fees ($0.6 million).
Lease Origination Expenses: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amended existing lease accounting standards for both lessees
and lessors (see note 2 to the consolidated financial statements). We adopted the new standard for the fiscal year beginning on January
1, 2019. Under ASU 2016-02, the FASB determined that only incremental costs or initial direct costs of executing a lease contract
qualify for capitalization, while prior accounting standards allowed for the capitalization of indirect leasing costs. We incurred $1.7
million of indirect leasing expenses during 2019.
Real estate impairment: The real estate impairment charge of $8.4 million during the first quarter of 2019 reduced the carrying value
of Quantico Corporate Center to its estimated fair value (see note 3 to the consolidated financial statements). During the first quarter
of 2018, 2445 M Street met the criteria for classification as held for sale. We consequently recorded an impairment charge of $1.9
million during the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated
selling costs.
Gain on sale of real estate: The gain during 2019 is due to the sale of 1776 G Street ($61.0 million), partially offset by a loss on the
sale of Quantico Corporate Center ($1.0 million). The gain during 2018 is due to the sale of 2445 M Street.
Interest Expense: Interest expense by debt type for the two years ended December 31, 2019 was as follows (in thousands, except
percentage amounts):
Debt Type
Notes payable
Mortgage notes payable
Line of credit
Capitalized interest
Total
Year Ended December 31,
2019
2018
$ Change
% Change
45,595
2,074
9,279
(3,214)
53,734
$
$
39,818
3,283
9,491
(2,091)
50,501
$
$
5,777
(1,209)
(212)
(1,123)
3,233
14.5 %
(36.8)%
(2.2)%
53.7 %
6.4 %
$
$
36
• Notes payable: Increase primarily due to executing the 2019 Term Loan in April 2019 and a $250 million term loan in March
2018, which increased and replaced a $150 million term loan.
• Mortgage notes payable: Decrease primarily due to the repayment of the mortgage notes secured by Kenmore Apartments in
•
2018.
Line of credit: Decrease primarily due to lower weighted average borrowings of $196.1 million during 2019, as compared to
$230.9 million during 2018, partially offset by a higher weighted average interest rate of 3.34% during 2019, as compared to
2.96% during 2018.
• Capitalized interest: Increase primarily due to higher spending related to The Trove, the multifamily development adjacent
to The Wellington, and the commencement in 2018 of interest capitalization on spending related to the multifamily development
adjacent to Riverside Apartments.
Loss on extinguishment of debt: We recognized a $1.2 million non-cash loss on extinguishment of debt during 2018 related to the write-
off of unamortized loan origination costs associated with the refinancing of an existing $150 million seven-year unsecured term loan
with a $250 million five-year unsecured term loan and the execution of an amended, extended and expanded $700 million unsecured
revolving credit facility (see note 6 to the consolidated financial statements).
Discontinued operations:
Income from properties sold or held for sale: Decrease primarily due to the sale of the properties classified as discontinued operations
during the third quarter of 2019.
Gain on sale of real estate: Increase due to gains on the sales of the Shopping Center Portfolio ($333.0 million) and Frederick Crossing/
Frederick County Square ($9.5 million), partially offset by a loss on the sale of Centre at Hagerstown ($3.5 million).
Loss on extinguishment of debt: We recognized a $0.8 million loss on extinguishment of debt during 2019 related to the prepayment
of the mortgage note secured by Olney Village Center prior to that property’s disposition as part of the Shopping Center Portfolio.
37
2018 Compared to 2017
The following tables reconcile NOI to net income attributable to the controlling interests and provide the basis for our discussion of
our consolidated results of operations and NOI in 2018 compared to 2017. All amounts are in thousands except percentage amounts.
Same-Store
2018
2017
$
Change
%
Change
Non-Same-Store
Acquisitions (1)
Development/
Redevelopment (2)
Held for Sale or
Sold (3)
All Properties
2018
2017
2018
2017
2018
2017
2018
2017
$
Change
%
Change
Real estate
rental revenue
Real estate
expenses
NOI
$241,457
$233,704
$ 7,753
3.3% $ 41,234
$ 14,518
$ — $ — $ 9,039
$ 32,059
$291,730
$280,281
$ 11,449
90,709
88,580
2,129
2.4% 11,306
4,680
21
—
3,556
12,140
105,592
105,400
192
$150,748
$145,124
$ 5,624
3.9% $ 29,928
$ 9,838
$
(21)
$ — $ 5,483
$ 19,919
$186,138
$174,881
$ 11,257
Reconciliation to net income attributable to the controlling interests:
4.1 %
0.2 %
6.4 %
10.2 %
(2.2)%
(94.3)%
(90.0)%
7.9 %
(111,826)
(101,430)
(10,396)
(22,089)
(22,580)
491
(1,886)
(33,152)
31,266
2,495
24,915
(22,420)
(50,501)
(46,793)
(3,708)
—
(1,178)
—
24,477
25,630
—
507
—
84
(507)
(100.0)%
(1,178)
(84)
(100.0)%
23,180
19,612
1,297
6,018
5.6 %
30.7 %
56
(56)
(100.0)%
$ 25,630
$ 19,668
$ 5,962
30.3 %
Depreciation and amortization
General and administrative expenses
Real estate impairment
Gain on sale of real estate
Interest expense
Other income
Loss on extinguishment of debt
Income tax benefit (expense)
Discontinued operations (4):
Income from properties sold or held for sale
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to the controlling interests
______________________________
(1)
Acquisitions:
2018 Office – Arlington Tower
2017 Office – Watergate 600
(2)
(3)
(4)
Development/redevelopment properties:
Multifamily development property – land adjacent to Riverside Apartments
Sold:
2018 Office – Braddock Metro Center and 2445 M Street
2017 Multifamily – Walker House Apartments
Discontinued operations:
2019 Retail – Wheaton Park, Bradlee Shopping Center, Shoppes of Foxchase, Gateway Overlook, Olney Village Center, Frederick County Square, Centre at Hagerstown and Frederick
Crossing
Real Estate Rental Revenue
Real estate rental revenue from same-store properties for the two years ended December 31, 2018 was as follows (in thousands, except
percentage amounts):
Multifamily
Office
Other
Total same-store real estate rental revenue
Year Ended December 31,
2018
2017
$ Change
% Change
$
$
95,194
128,201
18,062
241,457
$
$
92,486
123,625
17,593
233,704
$
$
2,708
4,576
469
7,753
2.9%
3.7%
2.7%
3.3%
• Multifamily: Increase primarily due to higher rental income ($2.3 million), tenant fees ($0.1 million) and parking income ($0.1
million).
• Office: Increase primarily due to higher rental income ($3.6 million) and reimbursements ($0.7 million).
Real estate rental revenue from acquisitions increased due to the acquisition of Arlington Tower ($22.4 million) in the first quarter of
2018 and Watergate 600 ($4.3 million) in the second quarter of 2017.
38
Real estate rental revenue from held for sale or sold properties decreased due to the sales of Braddock Metro Center ($10.5 million)
during the first quarter of 2018, 2445 M Street ($9.7 million) during the second quarter of 2018 and Walker House Apartments ($2.8
million) during the fourth quarter of 2017.
Ending occupancy represents occupied square footage indicated as a percentage of total square footage as of the last day of that period.
Ending occupancy for properties classified as continuing operations for the two years ended December 31, 2018 was as follows:
December 31, 2018
December 31, 2017
Increase (decrease)
Segment
Multifamily
Office
Other
Total
Same-Store
94.8%
91.7%
89.9%
93.1%
Non-Same-
Store
Total
Same-Store
Non-Same-
Store
Total
N/A
95.1%
N/A
95.1%
94.8%
92.3%
89.9%
93.2%
94.1%
92.0%
88.3%
92.7%
N/A
84.0%
N/A
84.0%
94.1%
90.1%
88.3%
91.7%
Same-Store
0.7 %
(0.3)%
1.6 %
0.4 %
Non-Same-
Store
Total
N/A
11.1%
N/A
11.1%
0.7%
2.2%
1.6%
1.5%
• Multifamily: The increase in same-store ending occupancy was primarily due to higher ending occupancy at The Ashby at
McLean, Bennett Park and Clayborne Apartments, partially offset by lower ending occupancy at Bethesda Hill Apartments.
• Office: The decrease in same-store ending occupancy was primarily due to lower ending occupancy at 2000 M Street and
1600 Wilson Boulevard, partially offset by higher ending occupancy at Army Navy Building.
During 2018, we executed new and renewed leases in our office segment as follows:
Office
Square Feet
(in thousands)
325
Average Rental
Rate
(per square foot)
49.22
$
______________________________
(1)
Consist of tenant improvements and leasing commissions.
Real Estate Expenses
% Rental Rate
Increase
Leasing Costs (1)
(per square foot)
54.86
10.3% $
Free Rent
(weighted average
months)
5.0
Real estate expenses as a percentage of revenue for the two years ended December 31, 2018 were 36.2% and 37.6%, respectively.
Real estate expenses from same-store properties for the two years ended December 31, 2018 were as follows (in thousands):
Multifamily
Office
Other
Total same-store real estate expenses
Year Ended December 31,
2018
2017
$ Change
% Change
$
$
37,214
$
36,349
$
48,459
5,036
47,295
4,936
90,709
$
88,580
$
865
1,164
100
2,129
2.4%
2.5%
2.0%
2.4%
• Multifamily: Increase primarily due to higher administrative ($0.7 million), custodial ($0.1 million) and utilities ($0.1 million)
expenses.
• Office: Increase primarily due to higher bad debt ($0.3 million), repairs and maintenance ($0.3 million), utilities ($0.2 million)
and custodial ($0.2 million) expenses.
Other Expenses
Depreciation and Amortization: Increase primarily due to the acquisition of Arlington Tower ($13.9 million) and Watergate 600 ($4.3
million) and due to higher depreciation and amortization at same-store properties ($2.1 million), partially offset by the dispositions of
2445 M Street ($5.2 million), Braddock Metro Center ($4.4 million), and Walker House Apartments ($0.3 million).
General and Administrative Expenses: Decrease primarily due to lower expenses related to an information systems upgrade performed
in 2017.
39
Real estate impairment: During the first quarter of 2018, 2445 M Street met the criteria for classification as held for sale. We consequently
recorded an impairment charge of $1.9 million during that quarter to reduce the carrying value of the property to its estimated fair
value, less estimated selling costs. The real estate impairment losses of $24.1 million and $9.1 million in 2017 reduced the carrying
values of 2445 M Street and Braddock Metro Center, respectively (see note 3 to the consolidated financial statements).
Gain on sale of real estate: Gain during 2018 is due to completion of the sale of 2445 M Street. An amendment to the purchase and
sale agreement executed during the second quarter of 2018 increased the contract sales price to $101.6 million. The gain during 2017
is due to the sale of Walker House Apartments for a contract sale price of $32.2 million.
Interest Expense: Interest expense by debt type for the two years ended December 31, 2018 was as follows (in thousands, except
percentage amounts):
Debt Type
Notes payable
Mortgage notes payable
Line of credit
Capitalized interest
Total
Year Ended December 31,
2018
2017
$ Change
% Change
$
$
39,818
$
37,487
$
3,283
9,491
(2,091)
50,501
$
4,063
6,207
(964)
46,793
$
2,331
(780)
3,284
(1,127)
3,708
6.2 %
(19.2)%
52.9 %
116.9 %
7.9 %
• Notes payable: Increase primarily due to executing the $250 million term loan in March 2018, which increased and replaced
the $150 million term loan.
• Mortgage notes payable: Decrease primarily due to the repayment of the mortgage notes secured by Kenmore Apartments in
•
2018 and Army Navy Building in 2017.
Line of credit: Increase primarily due to weighted average borrowings of $230.9 million and a weighted average interest rate
of 2.96% during 2018, as compared to $179.6 million and 2.15%, respectively, during 2017.
• Capitalized interest: Increase primarily due to higher spending related to the Trove, the multifamily development adjacent to
The Wellington, and the commencement in 2018 of interest capitalization on spending related to the multifamily development
adjacent to Riverside Apartments.
Loss on extinguishment of debt: We recognized a $1.2 million non-cash loss on extinguishment of debt during 2018 related to the write-
off of unamortized loan origination costs associated with the refinancing of an existing $150 million seven-year unsecured term loan
with a $250 million five-year unsecured term loan and the execution of an amended, extended and expanded $700 million unsecured
revolving credit facility (see note 4 to the consolidated financial statements).
Discontinued operations:
Income from properties sold or held for sale: Increase primarily due to lower depreciation and amortization and lower interest expense
at the properties classified as discontinued operations (see note 3 to the consolidated financial statements).
40
Liquidity and Capital Resources
Capital Structure
We manage our capital structure to reflect a long-term investment approach, generally seeking to match the cash flow of our assets
with a mix of equity and various debt instruments. We expect that our capital structure will allow us to obtain additional capital
from diverse sources that could include additional equity offerings of common shares, public and private secured and unsecured
debt financings, asset dispositions, operating units and joint venture equity. Our ability to raise funds through the incurrence of
debt and issuance of equity securities is dependent on, among other things, general economic conditions, general market conditions
for REITs, our operating performance, our debt rating and the current trading price of our common shares. We analyze which
source of capital we believe to be most advantageous to us at any particular point in time.
As of February 13, 2020, we had cash and cash equivalents of approximately $31.7 million and availability under our Revolving
Credit Facility of $573.0 million. We currently expect that our potential sources of liquidity for acquisitions, development,
redevelopment, expansion and renovation of properties, and operating and administrative expenses, may include:
• Cash flow from operations;
• Borrowings under our Revolving Credit Facility or other new short-term facilities;
•
•
•
Issuances of our equity securities and/or common units in operating partnerships;
Issuances of preferred shares;
Proceeds from long-term secured or unsecured debt financings, including construction loans and term loans, or the
issuance of debt securities;
Investment from joint venture partners; and
•
• Net proceeds from the sale of assets.
During 2020, we expect that we will have significant capital requirements, including the following items:
Funding dividends and distributions to our shareholders;
•
• Approximately $85 - $90 million to invest in our existing portfolio of operating assets, including approximately $20 -
$25 million to fund tenant-related capital requirements and leasing commissions;
• Approximately $42.5 - $47.5 million to invest in our development and redevelopment projects; and
•
Funding for potential property acquisitions throughout 2020, offset by proceeds from potential property dispositions.
There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. We
currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the
capital resources necessary to fund our requirements in 2020. However, as a result of general market conditions in the greater
Washington metro region, economic conditions affecting the ability to attract and retain tenants, rising interest rates or declines
in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we
may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms,
or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different
than what is stated in the prior paragraph. If capital were not available, we may be unable to satisfy the distribution requirement
applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine
capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating
assets.
Debt Financing
We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term
loans and mortgages, to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the
returns from our real estate assets. If we issue unsecured debt in the future, we would seek to ladder the maturities of our debt to
mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing
purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial
instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in
managing our debt mix. We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate
debt to give it an effective variable interest rate.
In January 2020, we prepaid the $45.6 million mortgage note payable secured by Yale West, recognizing a gain on extinguishment
of debt of $0.5 million.
41
Our future debt principal payments are scheduled as follows (in thousands):
4.9%
2.7%
4.0%
2.8%
7.4%
3.9%
3.8%
3.9%
Year
2020
2021
2022
2023
2024
Thereafter
Mortgage
Notes Payable
Unsecured
Notes Payable/
Term Loans
Revolving
Credit Facility
Total Debt
Average
Interest Rate
$
45,611 (4) $
250,000
$
— $
295,611
—
—
—
—
—
150,000 (1)
300,000
—
—
250,000 (2)
56,000 (3)
—
50,000
—
—
150,000
300,000
306,000
—
50,000
Scheduled principal payments
45,611
1,000,000
56,000
1,101,611
Scheduled mortgage note
amortization payments
Premiums and discounts, net
Debt issuance costs, net
43
1,470
(50)
Total
$
47,074
$
—
(797)
(2,481)
996,722
—
—
—
$
56,000
43
673
(2,531)
$ 1,099,796
______________________________
(1)
(2)
(3)
(4)
WashREIT uses interest rate derivatives to effectively fix the $150.0 million term loan's variable interest rate at 2.72%.
WashREIT uses interest rate derivatives to effectively fix the $250.0 million term loan's variable interest rate at 2.87%.
Maturity date for the unsecured line of credit of March 2023 assumes election of option for two additional 6-month periods.
In January 2020, WashREIT prepaid the existing mortgage note associated with Yale West. We incurred a gain on extinguishment of debt of $0.5 million
associated with this prepayment
The weighted average maturity for our debt is 2.5 years. If principal amounts due at maturity cannot be refinanced, extended or
paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing
debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial
real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations.
From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market
purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
42
Debt Covenants
Our Revolving Credit Facility contains financial and other covenants with which we must comply. Some of these covenants
include:
•
•
•
•
•
ratio of total debt to total asset value of not more than 0.60 to 1.00 (subject to a higher level following material acquisitions);
ratio of adjusted EBITDA (earnings before noncontrolling interests, interest expense, income tax expense, depreciation,
amortization, acquisition costs, and extraordinary, unusual or nonrecurring gains and losses) to fixed charges of not less
than 1.50 to 1.00;
ratio of secured indebtedness to total asset value of not more than 0.40 to 1.00;
ratio of adjusted net operating income from unencumbered properties satisfying certain criteria specified in the Credit
Agreement to interest expense on unsecured indebtedness of not less than 1.75 to 1.00; and
ratio of unsecured indebtedness to the unencumbered pool value of properties satisfying certain criteria specified in, and
valued per the terms of, the Credit Agreement of not more than 0.60 to 1.00 (subject to a higher level following material
acquisitions).
Our unsecured notes contain covenants with which we must comply, including:
• A maximum ratio of 65.0% of total indebtedness to total assets;
• A maximum ratio of 40.0% of secured indebtedness to total assets;
• A minimum ratio of 1.50 of our income available for debt service payments to required debt service payments; and
• A minimum ratio of 1.50 of total unencumbered assets to total unsecured indebtedness.
Failure to comply with any of the covenants under our Revolving Credit Facility, unsecured notes or other debt instruments could
result in a default under one or more of our debt covenants. This could cause our lenders to accelerate the timing of payments and
could therefore have a material adverse effect on our business, operations, financial condition and liquidity. In addition, our ability
to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.
As of December 31, 2019, we were in compliance with the covenants related to our then-existing mortgage notes, Revolving
Credit Facility and unsecured notes.
Common Equity
We have authorized for issuance 100.0 million common shares, of which approximately 82.1 million shares were outstanding at
December 31, 2019.
On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “2018 Equity Distribution
Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup
Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and SunTrust
Robinson Humphrey, Inc. relating to the issuance of up to $250.0 million of our common shares from time to time. Issuances of
our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of
common shares under this program for general business purposes, including, without limitation, working capital, the acquisition,
renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt.
Our issuances and net proceeds on the 2018 Equity Distribution Agreements for the years ended December 31, 2019 and 2018
were as follows (in thousands; except per share data):
Issuance of common shares
Weighted average price per share
Net proceeds
Year Ended December 31,
2019
2018
1,859
30.00
54,916
$
$
1,165
31.18
35,472
$
$
The 2018 Equity Distribution Agreements replaced our previous equity distribution agreements with Wells Fargo Securities, LLC,
BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc. and RBC Capital Markets LLC, dated June 23, 2015. We did
not issue any common shares on the previous equity distribution agreements during 2018. For the year ended December 31, 2017,
we issued 3.6 million common shares at a weighted average price per share of $32.06 for net proceeds of $113.2 million on the
previous equity distribution agreements.
43
We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase
common shares. The common shares sold under this program may either be common shares issued by us or common shares
purchased in the open market.
Our issuances and net proceeds on the dividend reinvestment program for the three years ended December 31, 2019 were as follows
(in thousands; except per share data):
Issuance of common shares
Weighted average price per share
Net proceeds
Preferred Equity
Year Ended December 31,
2019
2018
2017
$
$
173
27.58
4,755
$
$
81
29.18
1,973
$
$
80
32.25
2,576
Our board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue
preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other
business purposes. As of December 31, 2019, no preferred shares are issued and outstanding.
Capital Commitments
We will require capital for development and redevelopment projects currently underway and in the future. We are currently engaged
in development activities for the ground-up development of a multifamily property (Trove) on land adjacent to The Wellington
and predevelopment activities for the ground-up development of a multifamily property on land adjacent to Riverside Apartments.
As of December 31, 2019, we had no outstanding contractual commitments related to our development and redevelopment projects,
and expect to fund approximately $42.5 - $47.5 million of total development and redevelopment spending during 2020.
In addition to our development and redevelopment projects, we anticipate funding several major renovation projects in our portfolios
during 2020, as follows (in thousands):
Office
Multifamily
Other
Total
$
$
8,214
23,112
534
31,860
These projects include unit, common area and lobby renovations and roof replacements at multifamily properties; elevator
modernizations, lobby renovations, HVAC replacements and garage and facade repairs at office properties; and roof and sprinklers
replacements at retail properties. Not all of the anticipated spending had been committed via executed construction contracts at
December 31, 2019. We expect to fund these projects using cash generated by our real estate operations, through borrowings on
our Revolving Credit Facility, or raising additional debt or equity capital in the public market.
44
Contractual Obligations
As of December 31, 2019, certain contractual obligations will require significant capital as follows (in thousands):
Long-term debt(1)
Purchase obligations(2)
Tenant-related capital(3)
Building capital(4)
Operating leases
Payments due by Period
Total
Less than 1
year
1-3 years
4-5 years
After 5
years
$ 1,215,946
$
336,367
$
813,266
$
7,250
$
59,063
9,367
12,363
3,443
13,543
3,656
12,363
3,443
323
5,711
—
—
805
—
—
—
520
—
—
—
11,895
______________________________
(1)
(2)
(3)
(4)
See notes 5, 6 and 7 of the consolidated financial statements. Amounts include principal, interest and facility fees.
Represents electricity and gas purchase agreements with terms through 2023.
Committed tenant-related capital based on executed leases as of December 31, 2019.
Committed building capital additions based on contracts in place as of December 31, 2019.
We have various standing or renewable contracts with vendors. The majority of these contracts can be canceled with immaterial
or no cancellation penalties, with the exception of our elevator maintenance, electricity and gas purchase agreements, which are
included above on the purchase obligations line. Contract terms on leases that can be canceled are generally one year or less. We
are currently committed to fund tenant-related capital improvements as described in the table above for executed leases. However,
expected leasing levels could require additional tenant-related capital improvements which are not currently committed. We expect
that total tenant-related capital improvements, including those already committed, will be approximately $20 - $25 million in
2020.
Historical Cash Flows
Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from
operations were to decline significantly, we may have to reduce our dividend. Consolidated cash flows for the three years ended
December 31, 2019 were as follows (in thousands):
Year ended December 31,
Variance
2019
2018
2017
2019 vs.
2018
2018 vs.
2017
Cash provided by operating activities
$
130,923
$
Cash provided by (used in) investing activities
Cash (used in) provided by financing activities
61,036
(184,848)
$
147,369
(38,942)
(113,410)
$
130,626
(196,354)
60,729
(16,446) $
99,978
(71,438)
16,743
157,412
(174,139)
Net cash provided by operating activities decreased in 2019 as compared to 2018 primarily due to the sales of the Retail Portfolio
during 2019 (see note 3 to the consolidated financial statements) and 2445 M Street in 2018, partially offset by the acquisition of
the Assembly Portfolio and Cascade at Landmark during 2019. Net cash provided by operating activities increased in 2018 as
compared to 2017 primarily due to the acquisitions of Arlington Tower in January 2018 and Watergate 600 in April 2017, partially
offset by higher interest payments and the sales of 2445 M Street in June 2018, Braddock Metro Center in January 2018 and
Walker House Apartments in October 2017.
Net cash provided by investing activities increased in 2019 as compared to 2018 primarily due to a higher volume of disposition
activity during 2019, partially offset by a higher volume of acquisition activity and higher development expenditures during 2019.
Net cash used in investing activities decreased in 2018 as compared to 2017 primarily due to a higher volume of disposition activity
and lower volume of acquisition activity in 2018.
Net cash used in financing activities increased in 2019 as compared to 2018 primarily due to higher net repayments on the Revolving
Credit Facility, partially offset by lower mortgage note repayments and higher proceeds from equity issuances. Net cash used in
financing activities increased in 2018 as compared to 2017 due to lower proceeds from equity issuances, lower net borrowings on
the Revolving Credit Facility, the repayment of the 2016 Term Loan and the repayments of a mortgage note secured by Kenmore
Apartments and a mortgage note at Arlington Tower’s settlement during 2018, partially offset by proceeds from the 2018 Term
Loan during 2018 and the repayment of the mortgage note secured by Army Navy Building during 2017.
45
Capital Improvements and Development Costs
Our capital improvement, development and redevelopment costs for the three years ended December 31, 2019 were as follows
(in thousands):
Accretive capital improvements and development costs:
Acquisition related
Expansions and major renovations
Development/redevelopment
Tenant improvements (including first generation leases)
Total accretive capital improvements (1)
Other capital improvements:
Total
Year Ended December 31,
2019
2018
2017
$
9,158
$
13,489
$
25,008
47,492
28,565
110,223
5,725
26,045
34,806
24,914
99,254
6,622
$
115,948
$
105,876
$
24,556
14,629
18,150
16,926
74,261
4,404
78,665
______________________________
(1) We consider these capital improvements to be accretive to revenue and not necessarily to net income.
Included in the capital improvement and development costs listed above are capitalized interest in the amount of $3.2 million,
$2.1 million and $1.0 million for the three years ended December 31, 2019, respectively, and capitalized employee compensation
in the amount of $1.2 million, $2.7 million and $2.5 million for the three years ended December 31, 2019, respectively.
Accretive Capital Improvements
Acquisition Related Improvements: Acquisition related improvements are capital improvements to properties acquired during the
preceding three years which were anticipated at the time we acquired the properties. These types of improvements were made in
2019 to Watergate 600, Arlington Tower, Cascade at Landmark and the Assembly Portfolio.
Expansions and Major Renovations: Expansion projects increase the rentable area of a property, while major renovation projects
are improvements sufficient to increase the income otherwise achievable at a property. Expansions and major renovations during
2019 included common area, lobby and unit renovations at Riverside Apartments; roof replacement, common area renovations,
unit renovations and facade repairs at The Wellington; heating system replacement, roof replacement and unit renovations at The
Kenmore; balcony and roof replacement at Bethesda Hill Apartments; lobby renovations at 1227 25th Street; roof replacement at
3801 Connecticut Avenue; and elevator modernization at The Ashby.
Development/Redevelopment: Development costs represent expenditures for ground up development of new operating properties.
Redevelopment costs represent expenditures for improvements intended to reposition properties in their markets and increase
income than would be otherwise achievable. Development/redevelopment costs in 2019 primarily include development costs for
the Trove, a multifamily development adjacent to The Wellington and predevelopment costs for a future multifamily development
adjacent to Riverside Apartments.
Tenant Improvements: Tenant improvements are costs, such as space build-outs, associated with commercial lease transactions.
Our average tenant improvement costs per square foot of space leased during the three years ended December 31, 2019 were as
follows:
Office
Year Ended December 31,
2019
2018
2017
$
69.99
$
33.51
$
62.28
The $36.48 increase in 2019 in tenant improvement costs per square foot of office space leased was primarily due to new leases
at Watergate 600 and Monument II executed in 2019. The $28.77 decrease in 2018 in tenant improvement costs per square foot
of office space leased was primarily due to tenant leases at Braddock Metro Center and Army Navy Building and a large lease
renewal at 1775 Eye Street executed in 2017.
46
Other Capital Improvements
Other capital improvements, also referred to as recurring capital improvements, are those not included in the above categories.
Over time these costs will be recurring in nature to maintain a property's income and value. In our multifamily properties, this
category includes improvements made as needed upon vacancy of an apartment. Such improvements totaled $3.2 million in 2019,
averaging approximately $1,340 per apartment for the 42% of apartments which turned over relative to our total portfolio of
apartment units. In our commercial properties and multifamily properties (aside from improvements related to apartment turnover),
improvements include facade repairs, installation of new heating and air conditioning equipment, asphalt replacement, permanent
landscaping, new lighting and new finishes. In addition, we incurred repair and maintenance expense of $5.7 million during 2019
to maintain the quality of our buildings.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 31, 2019 that are reasonably likely to have a current or future material
effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Forward-Looking Statements
Some of the statements contained in this Form 10-K constitute forward-looking statements within the meaning of federal securities
laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or
trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking
statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which
are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve
known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of
WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, but are not limited to:
(a) the risks associated with ownership of real estate in general and our real estate assets in particular;
(b) the economic health of the greater Washington Metro region;
(c) the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges
anticipated and on the terms and timing anticipated;
(d) changes in the composition of our portfolio;
(e) fluctuations in interest rates;
(f) reductions in or actual or threatened changes to the timing of federal government spending;
(g) the risks related to use of third-party providers and joint venture partners;
(h) the ability to control our operating expenses;
(i)
(j)
(k) shifts away from brick and mortar stores to e-commerce;
(l)
(m) compliance with applicable laws, including those concerning the environment and access by persons with disabilities;
(n) terrorist attacks or actions and/or cyber attacks;
(o) weather conditions and natural disasters;
(p) ability to maintain key personnel;
(q) failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and
(r) other factors discussed under the caption “Risk Factors.”
the availability and terms of financing and capital and the general volatility of securities markets;
the economic health of our tenants;
the supply of competing properties;
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. For a further
discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements,
see the section entitled “Risk Factors.” We undertake no obligation to update our forward-looking statements or risk factors to
reflect new information, future events, or otherwise.
Funds From Operations
NAREIT FFO is a widely used measure of operating performance for real estate companies. We provide NAREIT FFO as a
supplemental measure to net income calculated in accordance with GAAP. Although NAREIT FFO is a widely used measure of
operating performance for REITs, NAREIT FFO does not represent net income calculated in accordance with GAAP. As such, it
should not be considered an alternative to net income as an indication of our operating performance. In addition, NAREIT FFO
47
does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay
distributions and should not be considered as an alternative to cash flow from operating activities, determined in accordance with
GAAP, as a measure of our liquidity. In its 2018 NAREIT FFO White Paper Restatement, the National Association of Real Estate
Investment Trusts, Inc. (“NAREIT”) defines NAREIT FFO as net income (computed in accordance with GAAP) excluding gains
(or losses) associated with sales of properties; impairments of depreciable real estate, and real estate depreciation and amortization.
We consider NAREIT FFO to be a standard supplemental measure for REITs because it facilitates an understanding of the operating
performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that
the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen
with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and
service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other
REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current
NAREIT definition differently.
The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net income for the
three years ended December 31, 2019 (in thousands):
Net income
Adjustments:
Depreciation and amortization
Real estate impairment
Gain on sale of depreciable real estate
Discontinued operations:
Depreciation and amortization
Gain on sale of depreciable real estate
NAREIT FFO
Critical Accounting Policies and Estimates
Year Ended December 31,
2019
2018
2017
$
383,550
$
25,630
$
19,612
136,253
8,374
(59,961)
111,826
1,886
(2,495)
4,926
(339,024)
134,118
$
9,402
—
146,249
$
$
101,430
33,152
(23,838)
10,626
—
140,982
We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements,
which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate these estimates on an on-
going basis, including those related to estimated useful lives of real estate assets, estimated fair value of acquired leases, cost
reimbursement income, bad debts, contingencies and litigation. We base the estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We cannot assure
you that actual results will not differ from those estimates.
We believe the following accounting estimates are the most critical to aid in fully understanding our reported financial results,
and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect
of matters that are inherently uncertain.
Accounting for Real Estate Acquisitions
We record acquired assets, including physical assets and in-place leases, and assumed liabilities, based on their fair values. We
determine the estimated fair values of the assets and liabilities in accordance with current GAAP fair value provisions. We determine
the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the replacement cost of
the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current
market conditions. We determine the fair value of land acquired based on comparisons to similar properties that have been recently
marketed for sale or sold.
The fair value of in-place leases consists of the following components: (a) the estimated cost to us to replace the leases, including
foregone rents during the period of finding a new tenant and foregone recovery of tenant pass-throughs (referred to as “absorption
cost”); (b) the estimated cost of tenant improvements, and other direct costs associated with obtaining a new tenant (referred to
as “tenant origination cost”); (c) estimated leasing commissions associated with obtaining a new tenant (referred to as “leasing
commissions”); (d) the above/at/below market cash flow of the leases, determined by comparing the projected cash flows of the
48
leases in place, including consideration of renewal options, to projected cash flows of comparable market-rate leases (referred to
as “net lease intangible”); and (e) the value, if any, of customer relationships, determined based on our evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with the tenant (referred to as “customer relationship value”).
We discount the amounts used to calculate net lease intangibles using an interest rate which reflects the risks associated with the
leases acquired. We include tenant origination costs in income producing property on our balance sheet and amortize the tenant
origination costs as depreciation expense on a straight-line basis over the useful life of the asset, which is typically the remaining
life of the underlying leases. We classify leasing commissions and absorption costs as other assets and amortize leasing commissions
and absorption costs as amortization expense on a straight-line basis over the remaining life of the underlying leases. We classify
above market net lease intangible assets as other assets and amortize them on a straight-line basis as a decrease to real estate rental
revenue over the remaining term of the underlying leases. We classify below market net lease intangible liabilities as other liabilities
and amortize them on a straight-line basis as an increase to real estate rental revenue over the remaining term of the underlying
leases. If any of the fair value of below market lease intangibles includes fair value associated with a renewal option, such amounts
are not amortized until the renewal option is executed. If the renewal option is not executed, the related value is expensed at that
time. Should a tenant terminate its lease prior to the expiration date, we accelerate the amortization of the unamortized portion of
the tenant origination cost (if it has no future value), leasing commissions, absorption costs and net lease intangible associated
with that lease over its new shorter term.
Credit Losses on Lease Related Receivables
Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents
receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate
the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit
loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable.
When collectability is determined not probable, any lease income recognized subsequent to recognizing the credit loss is limited
to the lesser of the lease income reflected on a straight-line basis or cash collected.
Real Estate Impairment
We recognize impairment losses on long-lived assets used in operations, development assets or land held for future development,
if indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual
and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment
and could be affected by future economic and market conditions. When determining if a property has indicators of impairment,
we evaluate the property's occupancy, our expected holding period for the property, strategic decisions regarding the property's
future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted
cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount
required to adjust the carrying amount to its estimated fair value, calculated in accordance with current GAAP fair value provisions.
Assets held for sale are recorded at the lower of cost or fair value less costs to sell.
U.S. Federal Income Taxes
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on
undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject
to corporate U.S. federal and state income tax on their taxable income at regular statutory rates, or as calculated under the alternative
minimum tax, as appropriate. As of both December 31, 2019 and 2018, our TRSs had a deferred tax asset of $1.4 million that was
fully reserved. As of both December 31, 2019 and 2018, we had deferred state and local tax liabilities of $0.6 million. These
deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, amortization and
depreciation.
49
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal material financial market risk to which we are exposed is interest rate risk. Our exposure to interest rate risk relates primarily
to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and
our variable rate line of credit. We primarily enter into debt obligations to support general corporate purposes, including acquisition of
real estate properties, capital improvements and working capital needs. We use interest rate swap arrangements to reduce our exposure
to the variability in future cash flows attributable to changes in interest rates.
The table below presents principal, interest and related weighted average fair value interest rates by year of maturity, with respect to debt
outstanding on December 31, 2019.
2020
2021
2022
2023
2024
Thereafter
Total
Fair Value
(dollars in thousands)
Unsecured fixed rate debt (1)
Principal
Interest payments
Interest rate on debt
maturities
Unsecured variable rate debt
Principal
Variable interest rate on
debt maturities
Mortgage note
Principal amortization (2)
(30 year schedule)
Interest payments
Weighted average
interest rate on principal
amortization
$250,000
$150,000
$300,000
$250,000
$
— $ 50,000
$1,000,000
$1,022,937
$ 39,102
$ 23,665
$ 22,644
$ 7,807
$ 3,625
$ 12,688
$ 109,531
5.1%
2.7%
4.0%
2.9%
—%
7.4%
4.0%
$
— $
— $
— $ 56,000
$
— $
— $
56,000
$
56,000
2.7%
2.7%
$ 45,654
$
211
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
45,654
$
47,899
— $
211
3.8%
3.8%
______________________________
(1)
(2)
Includes $150.0 million and $250.0 million term loans with floating interest rates. The interest rates on the $150.0 million and $250.0 million term loans are
effectively fixed by interest rate swap arrangements at 2.7% and 2.9%, respectively.
Excludes net discounts of $1.5 million as of December 31, 2019. The amount was prepaid in January 2020. We incurred a gain on extinguishment of debt of $0.5
million in association with this prepayment.
We entered into the interest rate swap arrangements designated and qualifying as cash flow hedges to reduce our exposure to the variability
in future cash flows attributable to changes in interest rates. Derivative instruments expose us to credit risk in the event of non-performance
by the counterparty under the terms of the interest rate hedge agreement. We believe that we minimize our credit risk on these transactions
by dealing with major, creditworthy financial institutions. As part of our ongoing control procedures, we monitor the credit ratings of
counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.
50
The following table sets forth information pertaining to interest rate swap contracts in place as of December 31, 2019 and 2018 and their
respective fair values (dollars in thousands):
Notional Amount
Fixed Rate
Floating Index Rate
Effective Date
Expiration Date
December 31, 2019
December 31, 2018
Fair Value as of:
$
75,000
75,000
100,000
50,000
25,000
25,000
25,000
25,000
50,000
50,000
50,000
50,000
1.619%
1.626%
1.205%
1.208%
2.610%
2.610%
2.610%
2.610%
1.680%
1.680%
1.718%
1.718%
One-Month USD-LIBOR
10/15/2015
3/15/2021
$
One-Month USD-LIBOR
10/15/2015
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
One-Month USD-LIBOR
3/31/2017
3/31/2017
6/29/2018
6/29/2018
6/29/2018
6/29/2018
4/1/2020
4/1/2020
4/1/2020
4/1/2020
3/15/2021
7/21/2023
7/21/2023
7/21/2023
7/21/2023
7/21/2023
7/21/2023
4/1/2030
4/1/2030
4/1/2030
4/1/2030
(28) $
(34)
1,218
607
(917)
(915)
(917)
(915)
844
844
1,018
1,018
1,367
1,353
5,270
2,648
(202)
(200)
(199)
(198)
—
—
—
—
$
600,000
$
1,823
$
9,839
51
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data appearing on pages 64 to 104 are incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2019. Based on the foregoing, our Chief Executive Officer, Chief Financial Officer
and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
Internal Control over Financial Reporting
See the Report of Management in Item 8 of this Form 10-K.
See the Reports of Independent Registered Public Accounting Firm in Item 8 of this Form 10-K.
During the three months ended December 31, 2019, there was no change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
In connection with its review and approval of named executive officer and trustee compensation, the Compensation Committee
of the board of trustees (the “Compensation Committee”) conducts a competitive review of named executive officer compensation
opportunities and trustee compensation arrangements. The Compensation Committee considers, in consultation with its
independent compensation consultant, compensation data and practices of its peer group, as well as current market trends and
practices generally, and, for the Company’s named executive officers, the Company’s pay-for-performance philosophy. Following
this review, the Compensation Committee recommended that the board of trustees adopt several changes to named executive
officer compensation arrangements and to non-employee trustee compensation arrangements, which proposals were subsequently
adopted by the board of trustees, as described below.
Named Executive Officer Compensation
On February 14, 2020, the board of trustees adopted an Amended and Restated Executive Officer Short-Term Incentive Plan (the
“STIP”) and an Amended and Restated Executive Officer Long-Term Incentive Plan (the “LTIP”). Upon adoption by the board
of trustees, both plans became effective for the performance periods beginning January 1, 2020. Among other changes, with the
goal of further aligning our executive officers’ compensation with the interest of our shareholders, the revised STIP and LTIP shift
award opportunities from the STIP to the LTIP in order to increase the portion of our executive compensation that is subject to
long-term performance. Also on February 14, 2020, the board of trustees approved an increase in base salary for the Company’s
named executive officers of 6% - 15%.
52
STIP
Under the STIP, as revised, all named executive officers will have the opportunity to receive an annual cash bonus based on the
achievement of certain performance measures that will be established for each performance period. Each year, the Compensation
Committee will establish the threshold, target and high performance goals for each performance measure, as well as the weighting
attributable to each such performance measure, with the aggregate weighting for all such performance measures to total 100%.
Such performance measures will consist of one or more financial performance measures and, if determined by the Compensation
Committee, individual performance measures.
Upon or following completion of a performance period, the degree of achievement of each financial performance measure will
be determined by the Compensation Committee. The degree of achievement of any individual financial performance measures
will be determined by the Compensation Committee in its discretion with respect to the Chief Executive Officer, and by the Chief
Executive Officer or other immediate supervisor in his or her discretion with respect to all other participants (subject to final
approval by the Compensation Committee), and the Compensation Committee will evaluate the degree of achievement of the
individual performance measures on a scale of below 1 (below threshold), 1 (threshold), 2 (target) or 3 (high) or any fractional
number between 1 and 3.
Each participant’s total award under the STIP with respect to a performance period will be stated as a percentage of the participant’s
annual base salary determined as of the first day of that performance period, which percentage will depend upon the participant’s
position and the degree of achievement of threshold, target, and high performance goals for the performance period which, except
as otherwise determined by the Compensation Committee, will be as set forth in the table below:
President and Chief Executive Officer
Executive Vice President
Senior Vice President
Threshold Target High
125% 188%
63%
93% 160%
48%
65% 115%
35%
If a Change in Control (as defined in the STIP) occurs during a performance period while the participant is employed, the participant
will receive a prorated award under the STIP calculated based on the actual levels of achievement of the prorated performance
goals as of the date of the Change in Control.
LTIP
Under the LTIP, as revised, all named executive officers will have the opportunity to receive awards based on (i) the achievement
of performance measures, which will be established for each performance period, and (ii) continued employment with the Company.
The aggregate weighting for the performance measures and the time-based measures, as determined by the Compensation
Committee, will total 100%. The performance measures will consist of one or more shareholder return measures and one or more
strategic measures. The awards earned under the LTIP, if any, are payable in our common shares of beneficial interest. Each
participant’s total award under the LTIP with respect to a performance period will be stated as a percentage of the participant’s
annual base salary determined as of the beginning of that performance period, which percentage will depend upon the participant’s
position and the degree of achievement of threshold, target, and high performance goals for the performance period which, except
as otherwise determined by the Compensation Committee, will be as set forth in the table below:
President and Chief Executive Officer
Executive Vice President
Senior Vice President
Threshold Target High
275% 440%
198%
200% 295%
143%
143% 207%
100%
Any time-based awards under the LTIP will be subject to a three-year vesting schedule, with any award vesting in one-third
increments on each December 15 of the applicable performance period if the participant remains employed by the Company on
each of such dates. The LTIP provides that following a performance period, 100% of any performance-based award will vest
immediately upon grant.
Each year, the Compensation Committee will establish the threshold, target and high performance goals for each performance
measures. Upon or following completion of a performance period, the degree of achievement of each performance measures will
be determined by the Compensation Committee it its discretion.
53
If a Change in Control (as defined in the LTIP) occurs during a performance period while the participant is employed, the LTIP
provides that all time-based awards which are unvested will become vested, and the participant will receive a pro-rated portion
of the shareholder return measure-based awards and the strategic measure-based awards will be calculated at target.
The descriptions of the STIP and LTIP provided herein are for summary purposes only and are qualified in their entirety by the
full and complete Amended and Restated Executive Officer Short-Term Incentive Plan and Amended and Restated Executive
Officer Long-Term Incentive Plan, which are filed as Exhibit 10.45 and Exhibit 10.46 hereto, respectively, and are incorporated
herein by reference.
Trustee Compensation
On February 14, 2020, the board of trustees updated its trustee compensation arrangements for non-employee trustees, which will
take effect immediately following the Company’s 2020 annual meeting of shareholders. The following is a summary of the updated
non-employee trustee compensation arrangements, which are subject to modification at any time by the board of trustees:
•
•
•
•
•
Each non-employee trustee will receive an annual retainer of $55,000 in cash and $100,000 in equity. The equity
grant is awarded 50% on December 15 of each calendar year and the remaining 50% on the earlier of the annual
shareholders meeting date or May 15 of the following calendar year. The annual retainer for any new independent
trustee will be prorated for the initial year.
Each non-employee trustee who serves as a chair of the board of trustees' Audit, Compensation and Corporate
Governance/Nominating Committees will receive an additional annual retainer of $20,000, $15,000, and $14,000
respectively, in cash. The committee chair retainer for any new committee chair will be prorated for the initial
year.
Each member of the Audit Committee, other than the chair, will receive an additional $10,000 annual retainer,
in cash, and each member of the Compensation Committee and the Corporate Governance/Nominating
Committee, other than the chairs, will receive an additional $7,500 annual retainer, in cash.
The lead independent trustee will receive an additional annual retainer of $50,000 in cash.
No additional fee will be paid based on board of trustees or committee meeting attendance.
In lieu of receiving their annual retainer in cash, a non-employee trustee may elect to receive the annual retainer in the form of
fully vested restricted share units.
54
PART III
Certain information required by Part III is omitted from this Form 10-K in that we will file a definitive proxy statement pursuant
to Regulation 14A with respect to our 2020 Annual Meeting (the “Proxy Statement”) no later than 120 days after the end of the
fiscal year covered by this Form 10-K, and certain information included therein is incorporated herein by reference. Only those
sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. In addition,
we have adopted a code of ethics that applies to all of our trustees, officers and employees, which can be reviewed and printed
from our website www.washreit.com.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
NAME
Trustees
Paul T. McDermott
Edward S. Civera
Benjamin S. Butcher
William G. Byrnes
Ellen M. Goitia
Thomas H. Nolan, Jr.
POSITION
Chairman and Chief Executive Officer, WashREIT
Lead Independent Trustee, WashREIT; Retired Chairman, Catalyst Health Solutions, Inc.
Chief Executive Officer, President and Chairman of the Board of Directors of STAG
Industrial, Inc.
Retired Managing Director, Alex Brown & Sons
Retired Partner, KPMG
Former Chairman of the Board and Chief Executive Officer, Spirit Realty Capital Inc.
Vice Adm. Anthony L. Winns (RET.) President, Middle East-Africa Region, Lockheed Martin Corporation
Executive Officers
Stephen E. Riffee
Taryn D. Fielder
Executive Vice President and Chief Financial Officer
Senior Vice President, General Counsel and Corporate Secretary
The other information required by this Item is hereby incorporated herein by reference to the Proxy Statement.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated herein by reference to the Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is hereby incorporated herein by reference to the Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is hereby incorporated herein by reference to the Proxy Statement.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is hereby incorporated herein by reference to the Proxy Statement.
55
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A). The following documents are filed as part of this Form 10-K:
1. Financial Statements
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page
60
61
63
64
65
66
67
68
70
Schedule II – Valuation and Qualifying Accounts
Schedule III – Consolidated Real Estate and Accumulated Depreciation
All other schedules are omitted because they are either not required or the required information is shown in the financial
statements or notes thereto.
101
102
3. Exhibits:
Exhibit
Number
Exhibit Description
Articles of Amendment and Restatement
Articles of Amendment to the Washington Real Estate Investment Trust Articles of
Amendment and Restatement
Amended and Restated Bylaws of Washington Real Estate Investment Trust, as
adopted on February 8, 2017
10-Q
001-06622
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Indenture dated as of August 1, 1996 between Washington REIT and The First National
Bank of Chicago
Form of 2028 Notes
Supplemental Indenture by and between Washington REIT and the Bank of New York
Trust Company, N.A. dated as of July 3, 2007
Form of 4.95% Senior Notes due October 1, 2020
Officers’ Certificate establishing the terms of the 4.95% Senior Notes due October 1,
2020
Form of 3.95% Senior Notes due October 15, 2022
Officers' Certificate establishing the terms of 3.95% Notes due October 15, 2022
Description of Registrant's Securities
10.1* Share Purchase Plan
10.2* Supplemental Executive Retirement Plan
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Supplemental Executive Retirement Plan
2007 Omnibus Long Term Incentive Plan
Deferred Compensation Plan for Officers dated January 1, 2007
Supplemental Executive Retirement Plan II dated May 23, 2007
Form of Indemnification Agreement by and between Washington REIT and the
indemnitee
Executive Stock Ownership Policy, adopted October 27, 2010
Amendment to Deferred Compensation Plan for Officers, adopted October 27, 2010
10.10* Amendment to Deferred Compensation Plan for Officers, adopted December 31, 2012
10-K
56
Incorporated by Reference
Form
File
Number
DEF 14A
001-06622
8-K
001-06622
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-Q
10-Q
10-K
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
DEF 14A
001-06622
10-K
10-K
8-K
8-K
8-K
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
Exhibit
Filing Date
Filed
Herewith
B
3.1
3.2
(c)
99.1
4.1
4.1
4.2
4.1
4.2
10(j)
10(k)
10(p)
B
10(gg)
10(hh)
10(nn)
10.31
10.32
10.37
4/1/2011
6/7/2017
7/31/2017
8/13/1996
2/25/1998
7/5/2007
9/30/2010
9/30/2010
9/17/2012
9/17/2012
11/14/2002
11/14/2002
3/16/2006
4/9/2007
2/29/2008
2/29/2008
7/27/2009
11/2/2010
11/2/2010
2/27/2013
X
Incorporated by Reference
Exhibit
Number
Exhibit Description
10.11* Amendment to Deferred Compensation Plan for Officers, adopted February 13, 2013
10.12* Amendment to Deferred Compensation Plan for Directors, adopted February 13, 2013
10.13* Amendment to Short Term Incentive Plan, adopted as of January 22, 2013
10.14* Amended and Restated Deferred Compensation Plan for Directors, effective October
22, 2013
10.15*
Employment Agreement dated August 19, 2013 with Paul T. McDermott
10.16* Change in control agreement dated October 1, 2013 with Paul T. McDermott
10.17* Amendment to Deferred Compensation Plan for Officers, adopted February 18, 2014
10.18* Amendment to Deferred Compensation Plan for Directors as Amended and Restated,
adopted February 18, 2014
10.19*
Short Term Incentive Compensation Plan (effective January 1, 2014)
10.20*
Long Term Incentive Plan (effective January 1, 2014)
10.21* Amendment to Short Term Incentive Plan (effective January 1, 2014)
10.22*
Executive Officer Severance Pay Plan, adopted August 4, 2014
10.23* Change in control agreement dated April 1, 2013 with Edward J. Murn IV
10.24* Description of Washington REIT Trustee Compensation Plan, effective January 1,
2015
10.25* Offer Letter to Stephen E. Riffee
10.26* Change in control agreement dated February 27, 2015 with Stephen E. Riffee
10.27* Revised Description of Washington REIT Trustee Compensation Plan, effective
January 1, 2015
10.28*
Statement of Amendment of STIP and LTIP for S. Riffee
10.29* Amendment to Long Term Incentive Plan
10.30* Amended and restated Trustee Deferred Compensation Plan
Form
10-Q
10-Q
10-Q
10-Q
10-Q
10-K
10-K
10-K
10-Q
10-Q
10-Q
10-Q
10-K
10-K
10-K
10-K
10-Q
10-Q
10-Q
10-Q
File
Number
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
001-06622
10.31*
2016 Omnibus Incentive Plan
DEF 14A
001-06622
10.32* Revocation of Statement of Amendment of STIP and LTIP
10.33* Offer letter to Taryn D. Fielder
10.34* Change in control agreement dated July 21,2017 with Taryn D. Fielder
10.35
10.36
Purchase and sale agreement, dated December 29, 2017, for Arlington Tower
Amended and Restated Credit Agreement, dated March 29, 2018, by and among
Washington Real Estate Investment Trust, as borrower, the financial institutions party
thereto as lenders, and Wells Fargo Bank, National Association, as administrative
agent
10-K
10-K
10-Q
10-K
10-Q
001-06622
001-06622
001-06622
001-06622
001-06622
Exhibit
Filing Date
Filed
Herewith
10.45
10.46
10.47
10.53
10.54
10.44
10.45
10.46
10.47
10.50
10.51
10.54
10.52
10.54
10.55
10.56
10.57
10.58
10.60
10.61
Annex
A
10.49
10.50
10.1
10.52
10.53
5/9/2013
5/9/2013
5/9/2013
11/1/2013
11/1/2013
3/3/2014
3/3/2014
3/3/2014
5/7/2014
8/5/2014
8/5/2014
10/30/2014
3/2/2015
3/2/2015
3/2/2015
3/2/2015
5/5/2015
5/5/2015
11/4/2015
11/4/2015
3/23/2016
2/20/2018
2/20/2018
7/31/2017
2/20/2018
5/1/2018
10.37* Amendment Number Two to Washington Real Estate Investment Trust 2014 Long-
10-Q
001-06622
10.54
4/30/2018
Term Incentive Plan (effective January 1, 2018)
10.38*
10.39*
Second Amendment to Washington Real Estate Investment Trust Short-Term Incentive
Plan
Separation Agreement and General Release between Thomas Q. Bakke and
Washington Real Estate Investment Trust
10-Q
001-06622
10.1
4/29/2019
10-Q
001-06622
10.2
4/29/2019
10.40* Amendment No. 1 to Separation Agreement and General Release between Thomas
10-Q
001-06622
10.3
4/29/2019
Q. Bakke and Washington Real Estate Investment Trust
10.41
10.42
10.43
Purchase and sale agreement, dated April 2, 2019, for the Assembly Portfolio by and
among Washington Real Estate Investment Trust and Barton’s Crossing LP, Magazine
Carlyle Station LP, Magazine Fox Run LP, Magazine Glen LP, Magazine Lionsgate
LP, Magazine Village At McNair Farms LP, and Magazine Watkins Station LP
First amendment to purchase and sale agreement, dated April 19, 2019, for the
Assembly Portfolio
Term Loan Agreement, dated April 30, 2019, by and among Washington Real Estate
Investment Trust, as borrower, Wells Fargo Bank, National Association, as
administrative agent, and the financial institutions party thereto as lenders or agents
10-Q
001-06622
10.1
7/29/2019
10-Q
001-06622
10.2
7/29/2019
8-K
001-06622
10.1
5/1/2019
10.44
Purchase and Sale Agreement, dated June 26, 2019, by and between Washington Real
Estate Investment Trust and Global Retail Investors, LLC
8-K
001-06622
10.1
7/26/2019
10.45* Washington Real Estate Investment Trust Amended and Restated Executive Short-
Term Incentive Plan, effective January 1, 2020
10.46* Washington Real Estate Investment Trust Amended and Restated Executive Long-
Term Incentive Plan, effective January 1, 2020
21
23
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
57
X
X
X
X
Exhibit
Number
24
31.1
31.2
31.3
32
Exhibit Description
Power of Attorney
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended (“the Exchange Act”)
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
Act
Certification of the Chief Accounting Officer pursuant to Rule 13a-14(a) of the
Exchange Act
Certification of the Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document - the instance document does not appear in the Interactive
Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and
contained in Exhibit 101)
Incorporated by Reference
Form
File
Number
Exhibit
Filing Date
Filed
Herewith
X
X
X
X
X
X
X
X
X
X
X
* Management contracts or compensation plans or arrangements in which trustees or executive officers are eligible to participate.
In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term debt of WashREIT or its subsidiaries
are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.
ITEM 16: FORM 10-K SUMMARY
We have chosen not to include a Form 10-K Summary.
58
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 18, 2020
WASHINGTON REAL ESTATE INVESTMENT TRUST
By:
/s/ Paul T. McDermott
Paul T. McDermott
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Paul T. McDermott
Paul T. McDermott
/s/ Edward S. Civera*
Edward S. Civera
/s/ Benjamin S. Butcher*
Benjamin S. Butcher
/s/ William G. Byrnes*
William G. Byrnes
/s/ Ellen M. Goitia*
Ellen M. Goitia
/s/ Thomas H. Nolan, Jr.*
Thomas H. Nolan, Jr.
/s/ Anthony L. Winns*
Anthony L. Winns
/s/ Stephen E. Riffee
Stephen E. Riffee
/s/ W. Drew Hammond
W. Drew Hammond
Chairman and Chief Executive Officer
February 18, 2020
Lead Independent Trustee
February 18, 2020
Trustee
Trustee
Trustee
Trustee
Trustee
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
Vice President, Chief Accounting Officer and
Treasurer
(Principal Accounting Officer)
February 18, 2020
* By: /s/ W. Drew Hammond through power of attorney
W. Drew Hammond
59
MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Washington Real Estate Investment Trust (“WashREIT”) is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of the effectiveness of internal controls over financial reporting.
WashREIT’s internal control system over financial reporting is a process designed under the supervision of WashREIT’s principal
executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions.
In connection with the preparation of WashREIT’s annual consolidated financial statements, management has undertaken an
assessment of the effectiveness of WashREIT’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the
Treadway Commission (the 2013 COSO Framework). Management’s assessment included an evaluation of the design of
WashREIT’s internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management has concluded that as of December 31, 2019, WashREIT’s internal control over financial
reporting was effective at a reasonable assurance level regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP, the independent registered public accounting firm that audited WashREIT’s consolidated financial statements
included in this report, has issued an unqualified opinion on the effectiveness of WashREIT’s internal control over financial
reporting, a copy of which appears on page 63 of this annual report.
60
To the Shareholders and the Board of Trustees of Washington Real Estate Investment Trust
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Washington Real Estate Investment Trust and Subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity
and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement
schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31,
2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), and our report dated February 18, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters
or on the accounts or disclosures to which they relate.
Impairment Assessment of Income Producing Properties
Description of
the Matter
The Company had net income producing property of $2.3 billion as of December 31, 2019 and recognized an
impairment charge of $8.4 million on real estate during the year ended December 31, 2019 as disclosed in Note
3 to the consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, real
estate is evaluated for recoverability based on estimated cash flows if there are indicators of potential impairment.
Auditing the Company's impairment analysis involved a high degree of subjectivity due to the uncertainty around
the Company’s estimated cash flows used in the impairment assessment. Estimated future cash flows are based
on assumptions, including the projected annual and residual cash flows and the estimated holding period for
individual properties, that are forward looking and could be affected by future economic and market conditions.
(cid:25)(cid:20)
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company’s process for assessing impairment of income producing properties. For example, we tested controls
over management’s review of properties’ expected future cash flows, which is used to evaluate qualitative and
quantitative indicators of impairment and in the recoverability evaluation, and we tested management’s review
of the sensitivity of assumptions used in their impairment assessment.
Our testing of the Company’s impairment assessment included, among other procedures, evaluating the
significant assumptions and testing the completeness and accuracy of the underlying data used by the Company
to develop its estimated future cash flows for individual income producing properties. We held discussions with
management about the current status of potential transactions and about management’s judgments to understand
the probability of future events that could affect the holding period and other cash flow assumptions for the
properties. We searched for and evaluated information that corroborates or contradicts the Company’s
assumptions. We also compared the significant assumptions to current industry, market and economic trends
and to the historical results of the properties.
Accounting for Acquisition of Real Estate Properties
Description of
the Matter
During 2019, the Company completed a series of acquisitions encompassing eight multifamily properties, for
a total purchase price of $531.5 million as disclosed in Notes 2 and 3 to the consolidated financial statements.
These transactions were accounted for as asset acquisitions.
Auditing the Company's accounting for these acquisitions was challenging due to the significant estimation
required by management to determine the fair values of the acquired assets used to allocate costs of the
acquisitions on a relative fair value basis. The significant estimation was primarily due to the sensitivity of the
respective fair values to underlying assumptions. The significant assumptions used to estimate the values of the
tangible and intangible assets included the replacement cost of the properties, estimated rental and absorption
rates, estimated future cash flows and other valuation assumptions.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company’s acquisition and purchase price allocation process, including controls over management’s review
of the significant assumptions described above. For example, we tested controls over management’s review of
the valuation methodology, the purchase price allocation, and the significant assumptions used.
To test the costs allocated to the tangible and intangible assets, we involved our valuation specialists and
performed audit procedures that included, among others, evaluating the Company’s valuation methodologies,
testing the significant assumptions described above and testing the completeness and accuracy of the underlying
data. For example, we compared the significant assumptions to observable market data, including other properties
within the same submarkets, and compared significant projected operating expenses used in the valuation to
historical results of the other properties in the Company's existing multifamily portfolio. We also performed
sensitivity analyses of the significant assumptions to evaluate the change in fair values resulting from the changes
in assumptions. In addition, we compared the Company’s estimated fair values of acquired assets to independent
estimates developed by our valuation specialist.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Tysons, Virginia
February 18, 2020
(cid:25)(cid:21)
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of Washington Real Estate Investment Trust
Opinion on Internal Control over Financial Reporting
We have audited Washington Real Estate Investment Trust and Subsidiaries’ internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Washington Real Estate
Investment Trust and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2019 consolidated financial statements of the Company and our report dated February 18, 2020 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 18, 2020
(cid:25)(cid:22)
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Assets
Land
Income producing property
Accumulated depreciation and amortization
Net income producing property
Properties under development or held for future development
Total real estate held for investment, net
Investment in real estate held for sale, net
Cash and cash equivalents
Restricted cash
Rents and other receivables
Prepaid expenses and other assets
Other assets related to properties sold or held for sale
Total assets
Liabilities
Notes payable, net
Mortgage notes payable, net
Line of credit
Accounts payable and other liabilities
Dividend payable
Advance rents
Tenant security deposits
Other liabilities related to properties sold or held for sale
Total liabilities
Equity
Shareholders’ equity
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued
or outstanding
Shares of beneficial interest, $0.01 par value; 100,000 shares authorized;
82,099 and 79,910 shares issued and outstanding, as of December 31, 2019
and December 31, 2018 respectively
Additional paid in capital
Distributions in excess of net income
Accumulated other comprehensive income
Total shareholders’ equity
Noncontrolling interests in subsidiaries
Total equity
Total liabilities and equity
December 31,
2019
2018
$
566,807
$
2,392,415
2,959,222
(693,610)
2,265,612
124,193
2,389,805
57,028
12,939
1,812
65,259
95,149
6,336
2,628,328
996,722
47,074
56,000
71,136
24,668
9,353
10,595
718
$
$
$
$
526,572
2,055,349
2,581,921
(669,281)
1,912,640
87,231
1,999,871
203,410
6,016
1,624
63,962
123,670
18,551
2,417,104
995,397
48,277
188,000
57,946
24,022
9,965
9,501
15,518
1,216,266
1,348,626
—
821
1,592,487
(183,405)
1,823
1,411,726
336
1,412,062
$
2,628,328
$
—
799
1,526,574
(469,085)
9,839
1,068,127
351
1,068,478
2,417,104
See accompanying notes to the consolidated financial statements.
64
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue
Real estate rental revenue
Expenses
Real estate expenses
Depreciation and amortization
Real estate impairment
General and administrative expenses
Lease origination expenses
Other operating income
Gain on sale of real estate
Real estate operating income
Other income (expense)
Interest expense
Other income
Loss on extinguishment of debt
Income tax benefit
Income (loss) from continuing operations
Discontinued operations:
Income from operations of properties sold or held for sale
Gain on sale of real estate
Loss on extinguishment of debt
Income from discontinued operations
Net income
Less: Net loss attributable to noncontrolling interests in subsidiaries
Continuing operations
Discontinued operations, including gain on sale of real estate
Net income attributable to the controlling interests per share
Diluted net income (loss) attributable to the controlling interests per share
Continuing operations
Discontinued operations, including gain on sale of real estate
Net income attributable to the controlling interests per share
Weighted average shares outstanding – basic
Weighted average shares outstanding – diluted
Year Ended December 31,
2019
2018
2017
$ 309,180
$ 291,730
$ 280,281
115,580
136,253
8,374
24,370
1,698
105,592
111,826
1,886
22,089
—
105,400
101,430
33,152
22,580
—
286,275
241,393
262,562
59,961
82,866
2,495
52,832
24,915
42,634
(53,734)
—
—
—
(53,734)
29,132
16,158
339,024
(764)
354,418
383,550
—
$
$
$
$
0.36
4.39
4.75
0.36
4.39
4.75
(50,501)
—
(1,178)
—
(51,679)
1,153
(46,793)
507
—
84
(46,202)
(3,568)
24,477
23,180
—
—
24,477
25,630
—
25,630
0.01
0.31
0.32
0.01
0.31
0.32
$
$
$
$
$
—
—
23,180
19,612
56
19,668
(0.05)
0.30
0.25
(0.05)
0.30
0.25
$
$
$
$
$
80,257
80,335
78,960
79,042
76,820
76,820
Net income attributable to the controlling interests
Basic net income (loss) attributable to the controlling interests per share
$ 383,550
See accompanying notes to the consolidated financial statements.
65
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Net income
Other comprehensive income:
Unrealized (loss) gain on interest rate hedges
Comprehensive income
Less: Net loss attributable to noncontrolling interests
Comprehensive income attributable to the controlling interests
Year Ended December 31,
2019
2018
2017
$ 383,550
$
25,630
$
19,612
(8,016)
375,534
—
420
26,050
—
1,808
21,420
56
$ 375,534
$
26,050
$
21,476
See accompanying notes to the financial statements.
66
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS)
Shares of
Beneficial
Interest at
Par Value
Shares
Additional
Paid in
Capital
Distributions
in Excess
of Net Income
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Non-
controlling
Interests in
Subsidiary
Total
Equity
74,606
$
746
$1,368,636
$ (326,047) $
7,611
$ 1,050,946
$
1,116
$1,052,062
19,668
—
19,668
Balance, December 31, 2016
Net income attributable to the
controlling interests
Net loss attributable to noncontrolling
interests
Unrealized gain on interest rate hedges
Distributions to noncontrolling interests
Contributions from noncontrolling
interest
Dividends
—
—
—
—
—
—
Equity offerings, net of issuance costs
3,587
Shares issued under Dividend
Reinvestment Program
Share grants, net of forfeitures and tax
withholdings
Balance, December 31, 2017
Net income attributable to the
controlling interests
Unrealized gain on interest rate hedges
Distributions to noncontrolling interests
Dividends
80
237
78,510
—
—
—
—
Equity offerings, net of issuance costs
1,165
Shares issued under Dividend
Reinvestment Program
Share grants, net of forfeitures and tax
withholdings
Balance, December 31, 2018
Cumulative effect of change in
accounting principle (see note 4)
Net income attributable to the
controlling interests
Unrealized loss on interest rate hedges
Distributions to noncontrolling interests
Dividends
81
154
79,910
—
—
—
—
—
Equity offerings, net of issuance costs
1,859
Shares issued under Dividend
Reinvestment Program
Share grants, net of forfeitures and tax
withholdings
173
157
—
—
—
—
—
—
36
1
2
—
—
—
(3,128)
—
—
113,158
2,575
2,739
19,668
—
—
—
—
(92,834)
—
—
—
—
—
1,808
—
—
—
—
—
—
—
1,808
(3,128)
—
(92,834)
113,194
2,576
2,741
785
1,483,980
(399,213)
9,419
1,094,971
—
—
—
—
11
1
2
—
—
—
—
35,461
1,972
5,161
25,630
—
—
(95,502)
—
—
—
—
420
—
—
—
—
—
25,630
420
—
(95,502)
35,472
1,973
5,163
799
1,526,574
(469,085)
9,839
1,068,127
—
—
—
—
—
18
2
2
—
—
—
—
—
54,898
4,753
6,262
(906)
383,550
—
—
(96,964)
—
—
—
—
—
(8,016)
—
—
—
—
—
(906)
383,550
(8,016)
—
(96,964)
54,916
4,755
6,264
(56)
—
(1,071)
376
—
—
—
365
—
—
(14)
—
—
—
—
351
—
—
—
(15)
—
—
—
—
(56)
1,808
(4,199)
376
(92,834)
113,194
2,576
2,741
1,095,336
25,630
420
(14)
(95,502)
35,472
1,973
5,163
1,068,478
(906)
383,550
(8,016)
(15)
(96,964)
54,916
4,755
6,264
Balance, December 31, 2019
82,099
$
821
$1,592,487
$ (183,405) $
1,823
$ 1,411,726
$
336
$1,412,062
See accompanying notes to the consolidated financial statements.
67
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of real estate
Depreciation and amortization
Credit (gains) losses on lease related receivables
Deferred tax benefit
Real estate impairment
Share-based compensation expense
Amortization of debt premiums, discounts and deferred issuance costs
Loss on extinguishment of debt
Changes in other assets
Changes in other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Real estate acquisitions, net
Capital improvements to real estate
Development in progress
Net cash received from sale of real estate
Real estate deposits, net
Non-real estate capital improvements
Net cash provided by (used in) investing activities
Cash flows from financing activities
Line of credit (repayments) borrowings, net
Principal payments – mortgage notes payable
Proceeds from dividend reinvestment program
Repayments of unsecured term loan debt
Proceeds from term loan
Payment of financing costs
Dividends paid
Distributions to noncontrolling interests
Net proceeds from equity offerings
Payment of tax withholdings for restricted share awards
Net cash (used in) provided by financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
68
Year Ended December 31,
2019
2018
2017
$ 383,550
$
25,630
$
19,612
(398,985)
141,179
(10)
—
8,374
7,743
3,195
764
(10,086)
(4,801)
130,923
(528,589)
(68,456)
(47,492)
706,064
—
(491)
61,036
(132,000)
(12,724)
4,755
(450,000)
450,000
(1,303)
(96,361)
(15)
54,916
(2,116)
(184,848)
7,111
7,640
(2,495)
121,228
(24,915)
112,056
2,136
—
1,886
6,746
2,101
1,178
(8,674)
(2,367)
147,369
(106,400)
(71,070)
(34,806)
174,297
—
(963)
(38,942)
22,000
(170,081)
1,973
(150,000)
250,000
(5,650)
(95,059)
(14)
35,472
(2,051)
(113,410)
(4,983)
12,623
882
(84)
33,152
4,771
1,897
—
(20,199)
3,454
130,626
(138,371)
(60,515)
(18,150)
30,798
(6,250)
(3,866)
(196,354)
46,000
(52,571)
2,576
—
50,000
(319)
(91,666)
(4,199)
113,194
(2,286)
60,729
(4,999)
17,622
$
14,751
$
7,640
$
12,623
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
2019
2018
2017
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest expense
$
50,999
$
49,058
$
45,730
Cash paid for income taxes
Change in accrued capital improvements and development costs
Dividend payable
Operating partnership units issued with acquisition
—
7,908
24,668
—
—
(2,769)
24,022
—
17
3,264
23,581
376
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash
$
$
12,939
1,812
14,751
$
$
6,016
1,624
7,640
$
$
9,847
2,776
12,623
See accompanying notes to the consolidated financial statements.
69
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 1: NATURE OF BUSINESS
Washington Real Estate Investment Trust (“WashREIT”), a Maryland real estate investment trust, is a self-administered equity
real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income-
producing real estate properties in the greater Washington D.C. metro region. We own a portfolio of multifamily and commercial
properties. During 2019, we acquired eight multifamily properties with a total of 2,390 units and sold eight retail properties (see
note 3). The eight sold retail properties met the criteria for classification as discontinued operations. The remaining retail properties
do not meet the qualitative or quantitative criteria for a reportable segment (see note 14). The acquisitions of multifamily properties
and dispositions of retail properties are part of a strategic shift away from the retail sector to the multifamily sector. This strategic
shift simplifies our portfolio to two reportable segments (multifamily and office) and reduces our exposure to future retail lease
expirations.
U.S. Federal Income Taxes
We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"),
and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90%
of our REIT taxable income (which is, generally, our ordinary taxable income, with certain modifications), excluding any net
capital gains and any deductions for dividends paid to our shareholders on an annual basis. When selling a property, we generally
have the option of (a) reinvesting the sales proceeds of property sold, in a way that allows us to defer recognition of some or all
taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital
gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as
a credit to our shareholders. During the three years ended December 31, 2019, we sold our interests in the following properties
(in thousands):
Disposition Date
June 26, 2019
July 23, 2019
August 21, 2019
August 27, 2019
Property
Quantico Corporate Center (1)
Shopping Center Portfolio (2)
Frederick Crossing and Frederick County Square
Centre at Hagerstown
December 19, 2019
1776 G Street
January 19, 2018
Braddock Metro Center
June 28, 2018
2445 M Street
October 23, 2017
Walker House Apartments
Type
Office
Retail
Retail
Retail
Office
Total 2019
Office
Office
Total 2018
Multifamily
Total 2017
(Loss)
Gain on Sale
(1,046)
333,023
9,507
(3,506)
61,007
398,985
—
2,495
2,495
23,838
23,838
$
$
$
$
$
$
______________________________
(1)
(2)
Consists of 925 and 1000 Corporate Drive.
Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase.
Seven of the eight retail properties sold during 2019 were identified for deferred exchanges under Section 1031 of the Code (see
note 3). We acquired eight multifamily replacement properties (see note 3) during 2019. The taxable gains for 1776 G Street, a
portion of the Shopping Center Portfolio proceeds not reinvested in the deferred exchange, and Walker House Apartments were
distributed to shareholders through quarterly dividends in their respective year of sale.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on
undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject
to corporate federal and state income tax on their taxable income at regular statutory rates, or as calculated under the alternative
70
minimum tax, as appropriate. As of both December 31, 2019 and 2018, our TRSs had a deferred tax asset of $1.4 million that was
fully reserved. As of both December 31, 2019 and 2018, we had deferred state and local tax liabilities of $0.6 million. These
deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, amortization and
depreciation.
Beginning in 2018, ordinary taxable income per share is equal to the Section 199A dividend that was created by the TCJA. The
following is a breakdown of the taxable percentage of our dividends for the years ended December 31, 2019, 2018 and 2017
(unaudited):
Ordinary income/Section 199A dividends
Return of capital
Qualified dividends
Unrecaptured Section 1250 gain
Capital gain
2019
2018
2017
80%
20%
—%
—%
—%
29%
71%
—%
—%
—%
76%
—%
2%
8%
14%
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Principles of Consolidation and Basis of Presentation
The accompanying audited consolidated financial statements include the consolidated accounts of WashREIT and our subsidiaries
and entities in which WashREIT has a controlling financial interest. All intercompany balances and transactions have been
eliminated in consolidation.
We have prepared the accompanying audited consolidated financial statements pursuant to the rules and regulations of the Securities
and Exchange Commission.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires
management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
71
Recent Accounting Standards
Standards Adopted
Standard/Description
ASU 2016-02, Leases (Topic 842). This
lease
standard
accounting standards for both lessees and
lessors.
existing
amends
Lessees must classify most leases as
either finance or operating leases. For
lease contracts, or contracts with an
embedded lease, with a duration of more
than one year in which we are the lessee,
the present value of future lease payments
are recognized on our consolidated
balance sheets as a right-of-use asset and
a corresponding lease liability.
Lessors
leases are accounted
Lease contracts currently classified as
operating
for
similarly to prior guidance. However,
lessors are required to account for each
lease and non-lease component, such as
common area maintenance or tenant
service revenues, of a contract separately.
In July 2018, the FASB issued 2018-11,
Leases
- Targeted
Improvements (“ASU 2018-11”), which
provides lessors optional transition relief
from implementing this aspect of ASU
2016-02 if the following criteria are met:
(1) both components have the same
timing and pattern of revenue and (2) if
accounted
both
components would be classified as an
operating lease.
separately,
(Topic
842)
for
Effective Date and
Adoption Considerations
We adopted the new
standard as of
January 1, 2019.
Effect on Financial Statements or Other significant Matters
We adopted ASU 2016-02 as of January 1, 2019 using the
modified retrospective approach and by applying the
transitional practical expedients noted below. Under the
modified retrospective approach, we recognized a cumulative
effect adjustment of $0.9 million to distributions in excess of
net income as of January 1, 2019 (see note 4 for further
discussion of the impact of adoption on our consolidated
financial statements). We did not elect the hindsight expedient,
which would have allowed us to reevaluate lease terms in
calculating lease liabilities as part of adoption.
We elected not to bifurcate lease contracts into lease and non-
lease components, since: (1) the timing and pattern of revenue
is not materially different and the non-lease components are
not the primary component of the lease, and (2) the lease
component, if accounted for separately, would be classified as
an operating lease. Accordingly, both lease and non-lease
components are presented in “Real estate rental revenue” in
our consolidated financial statements. The adoption of ASU
2016-02 did not result in a material change to our recognition
of real estate rental revenue.
Under ASU 2018-11, the FASB offered optional transition
relief, if elected as a package, and applied consistently by an
entity to all of its leases. Accordingly, upon adoption we
elected, as a package, the practical expedients for all leases as
follows: (1) we did not reassess whether any expired or existing
contracts are or contain leases, (2) we did not reassess the lease
classification for any expired or existing leases, and (3) we did
not reassess initial direct costs for any existing leases under
ASC 840.
Also, under ASU 2016-02, only
incremental costs or initial direct costs of
executing a lease contract qualify for
capitalization, while prior accounting
standards allowed for the capitalization of
indirect leasing costs.
72
New Accounting Standards Issued But Not Yet Effective
Effective Date and
Adoption Considerations
We adopted the new
standard
of
as
January 1, 2020.
Effect on Financial Statements or Other significant Matters
The adoption of the new standard did not have a material
impact on our consolidated financial statements.
We adopted the new
standard
of
as
January 1, 2020.
The adoption of the new standard did not have a material
impact on our consolidated financial statements.
trade
requires
financial
receivables,
Standard/Description
ASU 2016-13, Measurement of Credit
Losses on Financial Instruments. This
assets
standard
measured at an amortized cost basis,
including
to be
presented at the net amount expected to
be collected. This standard does not apply
to receivables arising from operating
leases accounted for in accordance with
Topic 842.
ASU 2018-15, Intangibles - Goodwill
and Other - Internal-Use Software. This
standard requires a customer in a cloud
computing arrangement that is a service
contract
internal-use
software guidance to determine which
implementation costs to capitalize as
assets.
to follow
the
Revenue Recognition
We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties
under operating leases with an average term of seven years. Substantially all commercial leases contain fixed escalations or, in
some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain
commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income
and rental abatements from our multifamily and commercial leases on a straight-line basis over the lease term. Recognition of
rental income commences when control of the leased space has been transferred to the tenant.
We recognize gains on sales of real estate when we have executed a contract for sale of the asset, transferred controlling financial
interest in the asset to the buyer and determined that it is probable that we will collect substantially all of the consideration for the
asset. Our real estate sale transactions typically meet these criteria at closing.
We recognize cost reimbursement income from pass-through expenses on an accrual basis over the periods in which the expenses
were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs
which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements.
Parking revenues are derived from leases, monthly parking agreements and transient parking. We recognize parking revenues from
leases on a straight-line basis over the lease term and monthly parking revenues as earned. We recognize transient parking revenue
when our performance obligation is met.
Rents and Other Receivables
Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents
receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate
the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit
loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable.
When collectability is determined not probable, any lease income recognized subsequent to recognizing the credit loss is limited
to the lesser of the lease income reflected on a straight-line basis or cash collected. The adoption of ASU 2016-02 resulted in an
adjustment to our opening distributions in excess of net income balance of $0.9 million, associated with lease related receivables
where collection of substantially all operating lease payments was not probable as of January 1, 2019. Rents and other receivables
on the consolidated balance sheet is net of allowance for doubtful accounts of $2.4 million as of December 31, 2018.
73
Debt Issuance Costs
We amortize external debt issuance costs using the effective interest rate method or the straight-line method which approximates
the effective interest rate method, over the estimated life of the related debt. We record debt issuance costs related to notes and
mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance
costs related to revolving lines of credit on our consolidated balance sheets with Prepaid expenses and other assets, regardless of
whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.
Deferred Leasing Costs
We capitalize and amortize direct and incremental costs associated with the successful negotiation of leases, both external
commissions and internal direct costs, on a straight-line basis over the terms of the respective leases. We record the amortization
of deferred leasing costs in Depreciation and amortization on the consolidated statements of operations. If an applicable lease
terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense.
We capitalize and amortize against revenue leasing incentives associated with the successful negotiation of leases on a straight-
line basis over the terms of the respective leases. We record the amortization of deferred leasing incentives as a reduction of
revenue. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the
costs as a reduction of revenue.
Real Estate and Depreciation
We depreciate buildings on a straight-line basis over estimated useful lives ranging from 28 to 50 years. We capitalize all capital
improvements associated with replacements, improvements or major repairs to real property that extend its useful life and depreciate
them using the straight-line method over their estimated useful lives ranging from 3 to 30 years. We also capitalize costs incurred
in connection with our development projects, including interest incurred on borrowing obligations and other internal costs during
periods in which qualifying expenditures have been made and activities necessary to get the development projects ready for their
intended use are in progress. Capitalization of these costs begins when the activities and related expenditures commence and ceases
when the project is substantially complete and ready for its intended use, at which time the project is placed into service and
depreciation commences. In addition, we capitalize tenant leasehold improvements when certain criteria are met, including when
we supervise construction and will own the improvements. We depreciate all tenant improvements over the shorter of the useful
life of the improvements or the term of the related tenant lease.
Real estate depreciation expense from continuing operations was $101.7 million, $82.9 million and $81.0 million during the years
ended December 31, 2019, 2018 and 2017, respectively.
We charge maintenance and repair costs that do not extend an asset’s useful life to expense as incurred.
Interest expense from continuing operations and interest capitalized to real estate assets related to development and major renovation
activities for the three years ended December 31, 2019 were as follows (in thousands):
Total interest incurred
Capitalized interest
Interest expense, net of capitalized interest
Year Ended December 31,
2019
2018
2017
$
$
56,948
(3,214)
53,734
$
$
52,592
(2,091)
50,501
$
$
47,757
(964)
46,793
We recognize impairment losses on long-lived assets used in operations, development assets or land held for future development,
if indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual
and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment
and could be affected by future economic and market conditions. When determining if a property has indicators of impairment,
we evaluate the property's occupancy, our expected holding period for the property, strategic decisions regarding the property's
future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted
cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount
required to adjust the carrying amount to its estimated fair value, calculated in accordance with current GAAP fair value provisions.
Assets held for sale are recorded at the lower of cost or fair value less costs to sell.
74
Acquisitions
The properties we acquire typically are not businesses as defined by ASU 2017-01, Business Combinations (Topic 805) - Clarifying
the Definition of a Business. Per this definition, a set of transferred assets and activities is not a business when substantially all of
the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. We
therefore account for such acquisitions as asset acquisitions. Acquisition costs are capitalized and identifiable assets (including
physical assets and in-place leases), liabilities assumed and any noncontrolling interests are measured by allocating the cost of
the acquisition on a relative fair value basis. Acquisitions executed prior to our adoption of ASU 2017-01 as of January 1, 2017
were accounted for as business combinations.
We determine the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the
replacement cost of the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions
consistent with current market conditions. We determine the fair value of land acquired based on comparisons to similar properties
that have been recently marketed for sale or sold.
The fair value of in-place leases consists of the following components – (a) the estimated cost to us to replace the leases, including
foregone rents during the period of finding a new tenant and foregone recovery of tenant pass-throughs (referred to as “absorption
cost”); (b) the estimated cost of tenant improvements, and other direct costs associated with obtaining a new tenant (referred to
as “tenant origination cost”); (c) estimated leasing commissions associated with obtaining a new tenant (referred to as “leasing
commissions”); (d) the above/at/below market cash flow of the leases, determined by comparing the projected cash flows of the
leases in place, including consideration of renewal options, to projected cash flows of comparable market-rate leases (referred to
as “net lease intangible”); and (e) the value, if any, of customer relationships, determined based on our evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with the tenant (referred to as “customer relationship value”).
We have attributed no value to customer relationships as of December 31, 2019 and 2018.
We discount the amounts used to calculate net lease intangibles using an interest rate which reflects the risks associated with the
leases acquired. We classify tenant origination costs as income producing property on our consolidated balance sheets and amortize
the tenant origination costs as depreciation expense on a straight-line basis over the remaining life of the underlying leases. We
classify leasing commissions and absorption costs as other assets and amortize leasing commissions and absorption costs as
amortization expense on a straight-line basis over the remaining life of the underlying leases. We classify net lease intangible
assets as other assets and amortize them on a straight-line basis as a decrease to real estate rental revenue over the remaining term
of the underlying leases. We classify net lease intangible liabilities as other liabilities and amortize them on a straight-line basis
as an increase to real estate rental revenue over the remaining term of the underlying leases. If any of the fair value of below market
lease intangibles includes fair value associated with a renewal option, such amounts are not amortized until the renewal option is
executed, else the related value is expensed at that time. Should a tenant terminate its lease prior to the expiration date, we accelerate
the amortization of the unamortized portion of the tenant origination cost, leasing commissions, absorption costs and net lease
intangible associated with that lease, over its new, shorter term.
Software Developed for Internal Use
The costs of software developed for internal use that qualify for capitalization are included with Prepaid expenses and other assets
on our consolidated balance sheets. These capitalized costs include external direct costs utilized in developing or obtaining the
applications and expenses for employees who are directly associated with the development of the applications. Capitalization of
such costs begins when the preliminary project stage is complete and continues until the project is substantially complete and is
ready for its intended purpose. Completed projects are amortized on a straight-line basis over their estimated useful lives.
Held for Sale and Discontinued Operations
We classify properties as held for sale when they meet the necessary criteria, which include: (a) senior management commits to
a plan to sell the assets, (b) the assets are available for immediate sale in their present condition subject only to terms that are usual
and customary for sales of such assets, (c) an active program to locate a buyer and other actions required to complete the plan to
sell the assets have been initiated, (d) the sale of the assets is probable, and transfer of the assets is expected to qualify for recognition
as a completed sale, within one year, (e) the assets are being actively marketed for sale at a price that is reasonable in relation to
its current fair value and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn. Depreciation on these properties is discontinued at the time they are classified as
held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.
Revenues and expenses of properties that are either sold or classified as held for sale are presented as discontinued operations for
all periods presented in the consolidated statements of operations if the dispositions represent a strategic shift that has (or will
75
have) a major effect on our operations and financial results. Interest on debt that can be identified as specifically attributed to these
properties is included in discontinued operations. If the dispositions do not represent a strategic shift that has (or will have) a major
effect on our operations and financial results, then the revenues and expenses of the properties that are classified as sold or held
for sale are presented as continuing operations in the consolidated statements of operations for all periods presented.
Segments
We evaluate performance based upon net operating income from the combined properties in each segment. Our reportable operating
segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the
chief operating decision maker for purposes of assessing segments’ performance. Net operating income is a key measurement of
our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses.
Cash and Cash Equivalents
Cash and cash equivalents include cash and commercial paper with original maturities of 90 days or less. We maintain cash deposits
with financial institutions that at times exceed applicable insurance limits. We reduce this risk by maintaining such deposits with
high quality financial institutions that management believes are credit-worthy.
Restricted Cash
Restricted cash includes funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrows and escrow
deposits required by lenders on certain of our properties to be used for future building renovations or tenant improvements.
Earnings Per Common Share
We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-
forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by
dividing net income attributable to the controlling interest less the allocation of undistributed earnings to unvested restricted share
awards and units by the weighted-average number of common shares outstanding for the period.
We also determine “Diluted earnings per share” under the two-class method with respect to the unvested restricted share awards.
We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation
for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of
operating partnership units under the if-converted method and our share based awards with performance conditions prior to the
grant date and all market condition awards under the contingently issuable method.
Stock Based Compensation
We currently maintain equity based compensation plans for trustees, officers and employees.
We recognize compensation expense for service-based share awards ratably over the period from the service inception date through
the vesting period based on the fair market value of the shares on the date of grant. We account for forfeitures as they occur. If an
award's service inception date precedes the grant date, we initially measure compensation expense for awards with performance
conditions at fair value at the service inception date based on probability of payout, and we remeasure compensation expense at
subsequent reporting dates until all of the award’s key terms and conditions are known and the grant date is established. We
amortize awards with performance conditions using the graded expense method. We measure compensation expense for awards
with market conditions based on the grant date fair value, as determined using a Monte Carlo simulation, and we amortize the
expense ratably over the requisite service period, regardless of whether the market conditions are achieved and the awards ultimately
vest. Compensation expense for the trustee grants, which fully vest immediately, is fully recognized upon issuance based upon
the fair market value of the shares on the date of grant.
Accounting for Uncertainty in Income Taxes
We can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination
or audit. To the extent that the “more likely than not” standard has been satisfied, the benefit associated with a tax position is
measured as the largest amount that is greater than 50% likely of being recognized upon settlement. As of December 31, 2019 and
2018, we did not have any unrecognized tax benefits. We do not believe that there will be any material changes to our uncertain
tax positions over the next twelve months.
76
We are subject to federal income tax as well as income tax of the states of Maryland and Virginia, and the District of Columbia.
However, as a REIT, we generally are not subject to income tax on our taxable income to the extent it is distributed as dividends
to our shareholders.
Tax returns filed for 2015 through 2019 tax years are subject to examination by taxing authorities. We classify interest and penalties
related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.
Derivatives
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and term loans bear
interest at variable rates. Our interest rate risk management objectives are to minimize interest rate fluctuation on long-term
indebtedness and limit the impact of interest rate changes on earnings and cash flows. To achieve these objectives, from time to
time, we may enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for
trading or speculative purposes. The interest rate swaps we enter into are recorded at fair value on a recurring basis. We assess
effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of
the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive income (loss). Our
cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument such as notional amounts,
settlement dates, reset dates, calculation period and LIBOR do not perfectly match. In addition, we evaluate the default risk of the
counterparty by monitoring the creditworthiness of the counterparty. When ineffectiveness of a cash flow hedge exists, the
ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings
in the period affected.
NOTE 3: REAL ESTATE
As of December 31, 2019 and 2018, our real estate investment portfolio classified as income producing property that is held and
used, at cost, consists of properties as follows (in thousands):
Multifamily
Office
Other (1)
December 31,
2019
2018
1,469,011
$
1,329,722
160,489
919,285
1,507,986
154,650
2,959,222
$
2,581,921
$
$
______________________________
(1)
Consists of the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S.
Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village.
Our results of operations are dependent on the overall economic health of our markets, tenants and the specific segments in which
we own properties. All property types are affected by external economic factors, such as inflation, consumer confidence and
unemployment rates, as well as changing tenant and consumer requirements.
As of December 31, 2019, no property accounted for more than approximately 10% of total assets. No single property or tenant
accounted for more than 10% of the real estate rental revenue.
We have properties under development/redevelopment and held for current or future development. The cost of our real estate
portfolio under development or held for future development as of December 31, 2019 and 2018 is as follows (in thousands):
Multifamily
Office
Other
December 31,
2019
2018
$
$
123,071
$
478
644
124,193
$
83,945
478
2,808
87,231
As of December 31, 2019, we have invested $110.4 million, including the cost of acquired land, in The Trove, a multifamily
development adjacent to The Wellington. We substantially completed major construction activities for The Trove garage levels
77
1-5 during the third quarter of 2019 and placed into service assets totaling $12.3 million. We expect to place the remainder of
Trove development cost into service during 2020. We have also invested $25.6 million, including the cost of acquired land, in a
multifamily development adjacent to Riverside Apartments. In addition, there are several other projects with minor development
activity in the multifamily and office segments.
Acquisitions
Our current strategy is to recycle legacy assets that lack the income growth potential we seek and to invest in high-quality assets
with compelling value-add returns through redevelopment opportunities in our existing portfolio and acquisitions that meet our
stringent investment criteria. We focus on properties inside the Washington metro region’s Beltway, near major transportation
nodes and in areas with strong employment drivers and superior growth demographics.
Properties and land for development acquired during the three years ended December 31, 2019 were as follows:
Acquisition Date
April 30, 2019
June 27, 2019
July 23, 2019
Property
Assembly Portfolio - Virginia (1)
Assembly Portfolio - Maryland (2)
Cascade at Landmark
Type
Multifamily
Multifamily
Multifamily
# of units
(unaudited)
Rentable
Square Feet
(unaudited)
Contract
Purchase Price
(in thousands)
1,685
428
277
2,390
N/A
N/A
N/A
$
$
$
$
379,100
82,070
69,750
530,920
250,000
135,000
January 18, 2018
Arlington Tower
April 4, 2017
Watergate 600
Office
Office
N/A
N/A
391,000
293,000
______________________________
(1)
(2)
Consists of Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, and Assembly Herndon.
Consists of Assembly Germantown and Assembly Watkins Mill. The Assembly Portfolio - Virginia and Assembly Portfolio - Maryland properties are
collectively the “Assembly Portfolio.”
The purchases of the Assembly Portfolio and Cascade at Landmark were structured as exchanges under Section 1031 of the Code
in a manner such that legal title was held by a 1031 exchange facilitator (an "Exchange Accommodator") until certain identified
properties were sold and the deferred exchanges were completed. We retained all of the legal and economic benefits and obligations
related to the Assembly Portfolio and Cascade at Landmark. As such, the Assembly Portfolio and Cascade at Landmark were
considered to be variable interest entities until legal title was transferred to us upon completion of the 1031 exchanges, which
occurred during the third quarter of 2019. We consolidated the assets and liabilities of the Assembly Portfolio and Cascade at
Landmark because we determined that WashREIT was the primary beneficiary of these properties.
The results of operations from acquired operating properties are included in the consolidated statements of operations as of their
acquisition dates.
The revenue and earnings of our acquisitions during their year of acquisition for the three years ended December 31, 2019 are as
follows (in thousands):
Real estate rental revenue
Net (loss) income
Year Ended December 31,
2019
2018
2017
$
$
27,641
(10,167)
22,389
$
3,623
14,518
2,226
As discussed in note 2, we record the acquired physical assets (land, building and tenant improvements), in-place leases (absorption,
tenant origination costs, leasing commissions, and net lease intangible assets/liabilities), and any other assumed liabilities on a
relative fair value basis.
78
We recorded the total cost of the above acquisitions as follows (in thousands):
Land
Buildings and improvements
Tenant origination costs
Leasing commissions/absorption costs
Net lease intangible assets
Net lease intangible liabilities
Deferred tax liability
Total
2019
2018
2017
$
$
92,391
423,663
—
15,474
—
—
—
531,528
$
$
63,970
142,900
13,625
27,465
3,142
(545)
—
250,557
$
$
45,981
66,241
12,084
23,161
498
(9,585)
(560)
137,820
As of December 31, 2019, the weighted remaining average life of the absorption costs was two months.
The difference in the total cost of the 2019 acquisitions of $531.5 million and the cash paid for the acquisitions per the consolidated
statements of cash flows of $528.6 million is primarily due to credits received at settlement totaling $2.9 million.
The difference in the total contract purchase price of $250.0 million for the 2018 acquisition and cash paid for the acquisition per
the consolidated statements of cash flows of $106.4 million is primarily due to a mortgage note assumed and repaid at settlement
($135.5 million), an acquisition deposit made during 2017 ($6.3 million), and a net credit to the buyer for certain expenditures
($2.4 million), partially offset by capitalized acquisition related costs ($0.6 million).
The difference in the total contract price of $135.0 million for the 2017 acquisition and cash paid for the acquisition per the
consolidated statements of cash flows of $138.4 million is primarily due to capitalized acquisition-related costs ($2.8 million) and
a net credit to the buyer for certain expenditures ($1.0 million), partially offset by the issuance of 12,124 operating partnership
units (“Operating Partnership Units”) as part of the consideration ($0.4 million). The Operating Partnership Units are units in
WashREIT Watergate 600 OP LP, a consolidated subsidiary of WashREIT. These Operating Partnership Units may be redeemed
for either cash equal to the fair market value of a share of WashREIT common stock at the time of redemption (based on a 20-day
average price) or, at the option of WashREIT, one registered or unregistered share of WashREIT common stock. In connection
with the 2017 acquisition, we granted registration rights to the two contributors of the Watergate 600 property relating to the resale
of any shares issued upon exchange of Operating Partnership Units pursuant to a shelf registration statement that we had an
obligation to make available to the contributors approximately one year after the issuance of the Operating Partnership Units. This
shelf registration statement was filed on March 8, 2018.
Balances, net of accumulated depreciation or amortization, as appropriate, of the components of the fair value of in-place leases
at December 31, 2019 and 2018 were as follows (in thousands):
Tenant origination costs
Leasing commissions/absorption costs
Net lease intangible assets
Net lease intangible liabilities
Below-market ground lease intangible asset
December 31,
$
Gross
Carrying
Value
50,155
122,348
15,183
29,836
12,080
2019
Accumulated
Amortization
33,364
$
92,401
11,964
20,854
2,282
Net
$ 16,791
29,947
3,219
8,982
9,798
$
Gross
Carrying
Value
57,897
114,354
16,353
31,124
12,080
2018
Accumulated
Amortization
36,570
$
77,194
11,947
20,016
2,093
Net
$ 21,327
37,160
4,406
11,108
9,987
Amortization of these combined components during the three years ended December 31, 2019, 2018 and 2017 was as follows (in
thousands):
Depreciation and amortization expense
Real estate rental revenue increase, net
Year Ended December 31,
2019
2018
2017
$
$
27,123
(924)
26,199
$
$
22,361
(1,225)
21,136
$
$
13,996
(776)
13,220
79
Amortization of these combined components over the next five years is projected to be as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Properties Sold and Held for Sale
Depreciation and
amortization
expense
Real estate rental
revenue, net
increase
Total
$
9,975
$
8,576
8,078
6,032
5,264
18,611
(406) $
(547)
(736)
(974)
(862)
(2,238)
9,569
8,029
7,342
5,058
4,402
16,373
We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring,
developing and owning our properties, and to make occasional sales of the properties that no longer meet our long-term strategy
or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other
properties, used to fund development operations or to support other corporate needs, or distributed to our shareholders. Depreciation
on these properties is discontinued when classified as held for sale, but operating revenues, other operating expenses and interest
continue to be recognized through the date of sale.
We classified as held for sale or sold our interests in the following properties during the three years ended December 31, 2019:
Disposition Date
June 26, 2019
July 23, 2019
August 21, 2019
Property
Quantico Corporate Center (1)
Shopping Center Portfolio (2)
Frederick Crossing and
Frederick County Square
August 27, 2019
Centre at Hagerstown
December 19, 2019
1776 G Street
N/A
John Marshall II
January 19, 2018
Braddock Metro Center
June 28, 2018
2445 M Street
October 23, 2017
Walker House Apartments
Type
Office
Retail
Retail
Retail
Office
Office
Total 2019
Office
Office
Total 2018
Multifamily
Total 2017
# of units
(unaudited)
Rentable
Square Feet
(unaudited)
Contract
Sale Price
(in thousands)
(Loss)
Gain on Sale
(in thousands)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
212
272,000
$
33,000
$
800,000
520,000
330,000
262,000
223,000
2,407,000
356,000
292,000
648,000
$
$
$
485,250
57,500
23,500
129,500
63,350
792,100
93,000
101,600
194,600
N/A $
$
32,200
32,200
$
$
$
$
$
(1,046)
333,023
9,507
(3,506)
61,007
N/A
398,985
—
2,495
2,495
23,838
23,838
______________________________
(1)
(2)
Consists of 925 and 1000 Corporate Drive.
Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase.
We have fully transferred control of the assets associated with these disposed properties and do not have continuing involvement
in the operations of these properties.
During the second quarter of 2019, we sold Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two
office buildings totaling 272,000 square feet, for a contract sale price of $33.0 million, recognizing a loss on sale of real estate of
$1.0 million. Prior to the sale, due to the negotiations to sell the property, we evaluated Quantico Corporate Center for impairment
and recognized an $8.4 million impairment charge during the first quarter of 2019 in order to reduce the carrying value of the
property to its estimated fair value. We based this fair valuation on the expected sale price from a potential sale. There were few
observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its
reliance on a quoted price in a market that is not active.
80
In June 2019, we entered into two separate purchase and sale agreements with two separate buyers to sell the Shopping Center
Portfolio and the Power Center Portfolio (Frederick Crossing, Frederick County Square and Centre at Hagerstown). As of June
30, 2019, we received a non-refundable deposit from the potential buyer of the Shopping Center Portfolio and expected to receive
a non-refundable deposit from the potential buyer of the Power Center Portfolio in July 2019. As of June 30, 2019, the properties
in the Retail Portfolio (as defined below) met the criteria for classification as held for sale.
We closed on the Shopping Center Portfolio sale transaction on July 23, 2019, recognizing a gain on sale of real estate of
$333.0 million. Prior to closing on the disposition of the Shopping Center Portfolio, we prepaid the mortgage note secured by
Olney Village Center (a property in the Shopping Center Portfolio), incurring a loss on extinguishment of debt of approximately
$0.8 million, which we recognized in the third quarter of 2019.
In the third quarter of 2019, the purchase and sale agreement to sell the Power Center Portfolio was amended to include only
Frederick Crossing and Frederick County Square. We closed on the sales of these assets on August 21, 2019, recognizing a gain
on sale of real estate of $9.5 million. Following the amendment to the purchase and sale agreement to sell the Power Center
Portfolio, we marketed Centre at Hagerstown for sale and identified a separate buyer. We closed on the sale of this asset on August
27, 2019, recognizing a loss on sale of real estate of $3.5 million.
References to the “Retail Portfolio” include the Shopping Center Portfolio and the Power Center Portfolio. The disposition of the
Retail Portfolio represents a strategic shift that had a major effect on our financial results and we have accordingly reported the
Retail Portfolio as discontinued operations. The Retail Portfolio represents assets generating a majority of the revenue from our
retail properties and we have determined that our retail line of business is no longer a reportable segment (see note 14).
In October 2019, we renewed and extended our lease with the World Bank at 1776 G Street NW, an office property in Washington,
DC, through December 31, 2025. In December 2019, we sold the property to the World Bank for a contract sale price of $129.5
million, recognizing a gain on sale of real estate of $61.0 million.
In December 2019, we executed a purchase and sale agreement to sell John Marshall II for a contract sale price of $63.4 million.
We anticipate settlement in the first quarter of 2020, however, there can be no assurances that this proposed sale will be consummated.
Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale.
During the first quarter of 2018, we sold Braddock Metro Center, a 356,000 square foot office property in Alexandria, Virginia
for a contract sales price of $93.0 million. Due to then-ongoing negotiations to sell the property, we evaluated Braddock Metro
Center for impairment and recognized a $9.1 million impairment charge during 2017 in order to reduce the carrying value of the
property to its estimated fair value, less selling costs. We based this fair valuation on the expected sale price from a potential sale.
There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy
due to its reliance on a quoted price in a market that is not active.
During the first quarter of 2018, we executed a purchase and sale agreement to sell 2445 M Street, a 292,000 square foot office
property in Washington, DC, for a contract sales price of $100.0 million, with settlement originally scheduled for the third quarter
of 2018. During 2017, we evaluated 2445 M Street for impairment and recognized a $24.1 million impairment charge in order to
reduce the carrying value of the property to its estimated fair value. Upon execution of the purchase and sale agreement, the
property met the criteria for classification as held for sale. Due to the property’s classification as held for sale, we recorded an
additional impairment charge of $1.9 million in the first quarter of 2018 in order to reduce the carrying value of the property to
its estimated fair value, less estimated selling costs. We based this fair value on the expected sales price from a potential sale.
There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy
due to its reliance on a quoted price in a market that is not active. During the second quarter of 2018, we executed an amendment
to the purchase and sale agreement which increased the contract sales price to $101.6 million and advanced the settlement date.
On June 28, 2018, we sold 2445 M Street, recognizing a gain on sale of real estate of $2.5 million.
During the second quarter of 2017, we executed a purchase and sale agreement for the sale of Walker House Apartments, a 212-
unit multifamily property in Gaithersburg, Maryland, for a contract sales price of $32.2 million. We closed on the sale during the
fourth quarter of 2017, recognizing a gain on sale of $23.8 million.
81
Discontinued Operations
The results of the Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands,
except for share data):
Real estate rental revenue
Real estate expenses
Depreciation and amortization
Interest expense
Loss on extinguishment of debt
Gain on sale of real estate
Income from discontinued operations
Basic net income per share
Diluted net income per share
Capital expenditures
2019
2018
2017
$
$
$
$
$
28,200
(6,803)
(4,926)
(313)
(764)
339,024
354,418
4.39
4.39
809
$
$
$
$
$
45,160
(10,638)
(9,402)
(643)
—
—
24,477
0.31
0.31
2,138
$
$
$
$
$
44,797
(10,251)
(10,626)
(740)
—
—
23,180
0.30
0.30
1,601
All assets related to the Retail Portfolio were sold as of December 31, 2019. As of December 31, 2018, assets related to the Retail
Portfolio were as follows (in thousands):
Land
Income producing property
Accumulated depreciation and amortization
Income producing property, net
Rents and other receivables
Prepaid expenses and other assets
Total assets
$
$
88,087
216,577
304,664
(101,254)
203,410
9,898
8,653
221,961
All liabilities related to the Retail Portfolio were sold as of December 31, 2019. As of December 31, 2018, liabilities related to the
Retail Portfolio were as follows (in thousands):
Mortgage notes payable, net
Accounts payable and other liabilities
Advance rents
Tenant security deposits
Liabilities related to properties sold or held for sale
$
$
11,515
1,620
1,771
612
15,518
82
NOTE 4: LEASE ACCOUNTING
Leasing as a Lessor
Future Minimum Rental Income
As of December 31, 2019, non-cancelable commercial operating leases provide for future minimum rental income from continuing
operations as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
$
$
139,053
133,907
120,491
102,877
91,253
301,974
889,555
Apartment leases are not included as the terms are generally for one year or less. Rental income under most of these commercial
leases increase in future years based on agreed-upon percentages or in some instances, changes in the Consumer Price Index.
Leasing as a Lessee
2000 M Street, an office property in Washington, DC, is subject to an operating ground lease with a remaining term of 51 years.
Rental payments under this lease are subject to percentage rent variable payments, which are not included as part of our measurement
of straight-line rental expense. We recognized straight-line rental expense of $0.3 million and variable rental payments of $0.9
million during each of the three years ended December 31, 2019.
Upon adoption of ASU 2016-02, we recognized a right-of-use asset (included in Income producing property) and lease liability
(included in Accounts payable and other liabilities) of $4.2 million. We used a discount rate of approximately 5.9%, which was
derived from our assessment of securitized rates for similar assets and credit quality. We recognized $0.3 million of right-of-use
asset and lease liability amortization during 2019. In addition, as of January 1, 2019, we reclassified the associated below-market
ground lease intangible asset of $10.0 million, net of accumulated amortization of $2.1 million, from Prepaid expenses and other
assets to Income producing property on our consolidated balance sheets.
The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on our
operating ground lease as of December 31, 2019 and a reconciliation of those cash flows to the operating lease liability as of
December 31, 2019 (in thousands):
2020
2021
2022
2023
2024
Thereafter
Imputed interest
Lease liability
$
$
260
260
260
260
260
11,895
13,195
(9,225)
3,970
83
NOTE 5: MORTGAGE NOTE PAYABLE
As of December 31, 2019 and 2018, we had outstanding mortgage notes payable, collateralized by a building and related land
from our portfolio, as follows (in thousands):
Properties
Yale West (3)
Premiums and discounts, net
Debt issuance costs, net
Assumption/Issuance
Date (1)
Effective Interest
Rate (2)
2019
2018
Payoff Date
2/21/2014
3.75% $
45,654
$
46,155
1/31/2020
December 31,
1,470
(50)
47,074
$
2,187
(65)
48,277
$
______________________________
(1)
(2)
(3)
This mortgage was assumed with the acquisition of the collateralized property. We record mortgages assumed in an acquisition at fair value.
Yield on the assumption/issuance date, including the effects of any premiums, discounts or fair value adjustments on the notes.
The maturity date of the mortgage note was January 1, 2052, but was prepaid in January 2020. We incurred a gain on extinguishment of debt of $0.5 million
in association with this prepayment.
Except as noted above, principal and interest are payable monthly until the maturity date, at which time all unpaid principal and
interest are payable in full.
Total cost basis of the above mortgaged properties was $77.4 million and $76.9 million at December 31, 2019 and 2018, respectively.
NOTE 6: UNSECURED LINES OF CREDIT PAYABLE
During the first quarter of 2018, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides
for a $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”), the continuation of an existing $150.0
million unsecured term loan (“2015 Term Loan”) and an additional $250.0 million unsecured term loan (“2018 Term Loan”). The
Revolving Credit Facility has a four-year term ending in March 2022, with two six-month extension options, and expands our
prior $600.0 million unsecured revolving credit facility that was set to expire in June 2019. The Credit Agreement has an accordion
feature that allows us to increase the facility up to $1.5 billion in the aggregate, to the extent the lenders agree to provide additional
revolving loan commitments or term loans.
The 2015 Term Loan has a 5.5 year term and currently has an interest rate of one month LIBOR plus 110 basis points, based on
WashREIT's current unsecured debt ratings. We entered into two interest rate swaps to effectively fix the interest rate at 2.7% (see
note 8).
The 2018 Term Loan increases and replaces the $150.0 million unsecured term loan, initially entered into on July 22, 2016 (“2016
Term Loan”), that was scheduled to mature in July 2023. The 2018 Term Loan is scheduled to mature in July 2023 and bears
interest at a rate of either one month LIBOR plus a margin ranging from 0.85% to 1.75% or the base rate plus a margin ranging
from 0% to 0.75% (in each case depending upon WashREIT’s credit rating). We used the $100.0 million of additional proceeds
from the 2018 Term Loan primarily to repay outstanding borrowings on the Revolving Credit Facility.
We had previously used interest rate derivatives to effectively fix the interest rate of the 2016 Term Loan. These interest rate
derivatives now effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. In March 2018, we
entered into interest rate derivatives that commenced on June 29, 2018 to effectively fix the interest rate on the remaining
$100.0 million of the 2018 Term Loan at 3.71%. The 2018 Term Loan has an all-in fixed interest rate of 2.87%.
The amount of the Revolving Credit Facility unused and available at December 31, 2019 was as follows (in thousands):
Committed capacity
Borrowings outstanding
Unused and available
$
$
700,000
(56,000)
644,000
84
We executed borrowings and repayments on the Revolving Credit Facility during 2019 as follows (in thousands):
Balance at December 31, 2018
Borrowings
Repayments
Balance at December 31, 2019
$
$
188,000
687,000
(819,000)
56,000
The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.775% to 1.55%
or the base rate plus a margin ranging from 0% to 0.55% (in each case depending upon WashREIT’s credit rating). The base rate
is the highest of the administrative agent's prime rate, the federal funds rate plus 0.5% and the LIBOR market index rate plus 1.0%.
In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10% to 0.30% (depending on
WashREIT’s credit rating) on the $700 million committed capacity, without regard to usage. As of December 31, 2019, the interest
rate on the facility was LIBOR plus 1.00%, the one month LIBOR was 1.70% and the facility fee was 0.20%.
All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in March 2022, unless extended
pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly
basis.
For the three years ended December 31, 2019, we recognized interest expense (excluding facility fees) and facility fees as follows
(in thousands):
Interest expense (excluding facility fees)
Facility fees
Year Ended December 31,
2019
2018
2017
$
$
6,554
1,400
$
6,843
1,371
3,857
1,217
The Revolving Credit Facility contains and the prior unsecured credit facility that it replaced contained certain financial and non-
financial covenants, all of which we have met as of December 31, 2019 and 2018. Included in these covenants are limits on our
total indebtedness, secured and unsecured indebtedness and required debt service payments.
Information related to revolving credit facilities for the three years ended December 31, 2019 as follows (in thousands, except
percentage amounts):
Total revolving credit facilities at December 31
Borrowings outstanding at December 31
Weighted average daily borrowings during the year
Maximum daily borrowings during the year
Weighted average interest rate during the year
Weighted average interest rate on borrowings outstanding at December 31
Year Ended December 31,
2019
2018
$
700,000
$
700,000
$
56,000
196,074
300,000
3.34%
2.73%
188,000
230,934
429,000
2.96%
3.52%
2017
600,000
166,000
179,633
252,000
2.15%
2.54%
The covenants under our Revolving Credit Facility require us to insure our properties against loss or damage in amounts customarily
maintained by similar businesses or as they may be required by applicable law. The covenants for the notes require us to keep all
of our insurable properties insured against loss or damage at least equal to their then full insurable value. We have an insurance
policy that has no terrorism exclusion, except for non-certified nuclear, chemical and biological acts of terrorism. Our financial
condition and results of operations are subject to the risks associated with acts of terrorism and the potential for uninsured losses
as the result of any such acts. Effective November 26, 2002, under this existing coverage, any losses caused by certified acts of
terrorism would be partially reimbursed by the United States under a formula established by federal law. Under this formula, the
United States pays 85% of covered terrorism losses exceeding the statutorily established deductible paid by the insurance provider,
and insurers pay 10% until aggregate insured losses from all insurers reach $100 billion in a calendar year. If the aggregate amount
of insured losses under this program exceeds $100 billion during the applicable period for all insured and insurers combined, then
each insurance provider will not be liable for payment of any amount which exceeds the aggregate amount of $100 billion. On
December 20, 2019, The Terrorism Risk Insurance Program Reauthorization Act of 2019 was signed into law, extending the
program through December 31, 2027.
85
NOTE 7: NOTES PAYABLE
Our unsecured notes and term loans outstanding as of December 31, 2019 and 2018 are as follows (in thousands):
Coupon/Stated Rate
Effective
Rate (1)
December 31,
2019
2018
Payoff Date/
Maturity Date (2)
10 Year Unsecured Notes
2015 Term Loan
4.95%
1 Month LIBOR + 110 basis points
3.95%
1 Month LIBOR + 110 basis points
7.25%
10 Year Unsecured Notes
2018 Term Loan (3)
30 Year Unsecured Notes
Total principal
Premiums and discounts, net
Deferred issuance costs, net
Total
10/1/2020
3/15/2021
10/15/2022
7/21/2023
2/25/2028
5.05%
2.72%
4.02%
2.87%
7.36%
$
250,000
150,000
300,000
250,000
50,000
1,000,000
(797)
(2,481)
996,722
$
250,000
150,000
300,000
250,000
50,000
1,000,000
(1,189)
(3,414)
995,397
______________________________
(1)
For fixed rate notes, the effective rate represents the yield on issuance date, including the effects of discounts on the notes. For variable rate notes, the
effective rate represents the rate as fixed by interest rate derivatives (see note 8).
(2) No principal amounts are due prior to maturity.
(3) The 2018 Term Loan increased and replaced the 2016 Term Loan (see note 6).
On April 30, 2019, we entered into a six-month, $450.0 million unsecured term loan facility (“2019 Term Loan”), maturing on
October 30, 2019 with an option to extend for a six-month period. The 2019 Term Loan bore interest, at WashREIT’s option, at
a rate of either LIBOR plus a margin ranging from 0.75% to 1.65% or the base rate plus a margin ranging 0.0% to 0.65% (in each
case depending upon WashREIT’s credit rating). The base rate was the highest of the administrative agent’s prime rate, the federal
funds rate plus 0.50% and the daily one-month LIBOR rate plus 1.0%. At WashREIT’s election, the 2019 Term Loan had an interest
rate of one-week LIBOR plus 100 basis points, based on WashREIT’s current unsecured debt rating. The 2019 Term Loan was
used to fund the acquisition of the Assembly Portfolio (see note 3). During the third quarter of 2019, we repaid the $450.0 million
of borrowings on the 2019 Term Loan with proceeds from the sale of the Retail Portfolio (see note 3).
The required principal payments on the unsecured notes and term loans as of December 31, 2019 are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
$
$
250,000
150,000
300,000
250,000
—
50,000
1,000,000
Interest on these notes is payable semi-annually, except for the term loans, for which interest is payable monthly. These notes
contain certain financial and non-financial covenants, all of which we have met as of December 31, 2019. Included in these
covenants is the requirement to maintain a minimum level of unencumbered assets, as well as limits on our total indebtedness,
secured indebtedness and required debt service payments.
86
NOTE 8: DERIVATIVE INSTRUMENTS
On September 15, 2015, we entered into two interest rate swap arrangements with a total notional amount of $150.0 million to
swap the floating interest rate under the 2015 Term Loan (see note 7) to an all-in fixed interest rate of 2.72% starting on October 15,
2015 and extending until the maturity of the 2015 Term Loan on March 15, 2021.
On July 22, 2016, we entered into two forward interest rate swap arrangements with a total notional amount of $150.0 million to
swap the floating interest rate under the 2016 Term Loan (see note 7) to an all-in fixed interest rate of 2.86%, starting on March 31,
2017 and extending until the scheduled maturity of the 2016 Term Loan on July 21, 2023.
On March 29, 2018, we entered into the $250.0 million 2018 Term Loan (see note 7) maturing on July 21, 2023, which increased
and replaced the 2016 Term Loan. The interest rate swap arrangements that had effectively fixed the 2016 Term Loan now effectively
fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. On March 29, 2018, we entered into four interest
rate swap arrangements with a total notional amount of $100.0 million to effectively fix the interest rate on the remaining $100.0
million of the 2018 Term Loan at 3.71%, that commenced on June 29, 2018 and extending until the maturity of the 2018 Term
Loan on July 21, 2023. The $250.0 million 2018 Term Loan has an all-in fixed interest rate of 2.87% (see note 6 and note 7).
In November 2019, we entered into four interest rate swap arrangements with a total notional amount of $200.0 million to reduce
our exposure to adverse fluctuations in interest rates on the future debt to replace our $250.0 million of 4.95% 10-year unsecured
notes maturing in 2020 (see note 7).
The interest rate swaps qualify as cash flow hedges and are recorded at fair value in accordance with GAAP, based on discounted
cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges
in other comprehensive income. The resulting unrealized loss on the effective portions of the cash flow hedges was the only activity
in other comprehensive income (loss) during the periods presented in our consolidated financial statements. We assess the
effectiveness of our cash flow hedges both at inception and on an ongoing basis. The cash flow hedges were effective for 2019
and 2018 and hedge ineffectiveness did not impact earnings in 2019 and 2018.
The fair values of the interest rate swaps as of December 31, 2019 and 2018, are as follows (in thousands):
Derivative Instrument
Aggregate
Notional
Amount
Effective Date
Maturity Date
2019
2018
Fair Value
Derivative Assets (Liabilities)
December 31,
Interest rate swaps
Interest rate swaps
Interest rate swaps
Interest rate swaps
$
150,000 October 15, 2015
March 15, 2021
$
(62) $
150,000 March 31, 2017
100,000
200,000
June 29, 2018
April 1, 2020
July 21, 2023
July 21, 2023
April 1, 2030
1,825
(3,664)
3,724
$
600,000
$
1,823
$
2,720
7,918
(799)
—
9,839
We record interest rate swaps on our consolidated balance sheets with prepaid expenses and other assets when in a net asset
position, and with accounts payable and other liabilities when in a net liability position. The interest rate swaps have been effective
since inception. The gains or losses on the effective swaps are recognized in other comprehensive income, as follows (in thousands):
Year Ending December 31,
2019
2018
2017
Unrealized (loss) gain on interest rate hedges
$
(8,016) $
420
$
1,808
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as
interest payments are made on our variable-rate debt. During the next twelve months, we estimate that $0.1 million will be
reclassified as an increase to interest expense.
We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default
on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the
indebtedness. As of December 31, 2019, the fair value of the derivative assets, including accrued interest, was $5.5 million, and
the fair value of the derivative liabilities, including accrued interest, was $3.7 million. As of December 31, 2019, we have not
87
posted any collateral related to these agreements.
Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest
rate hedge agreement. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy
financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our
credit risk concentration.
NOTE 9: FAIR VALUE DISCLOSURES
Assets and Liabilities Measured at Fair Value
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements
are required to be disclosed separately for each major category of assets and liabilities, as follows:
Level 1: Quoted prices in active markets for identical assets
Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs
The only assets or liabilities we had at December 31, 2019 and 2018 that are recorded at fair value on a recurring basis are the
assets held in the Supplemental Executive Retirement Plan ("SERP"), which primarily consists of investments in mutual funds,
and the interest rate swaps (see note 8).
We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these
valuations fall into Level 2 in the fair value hierarchy.
The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow
analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps,
including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed
cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or
receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments in the fair value measurements to
appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit
valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In
adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting
and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation
of interest rate swaps fall into Level 2 in the fair value hierarchy.
The fair values of these assets and liabilities at December 31, 2019 and 2018 were as follows (in thousands):
December 31, 2019
December 31, 2018
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Fair Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
SERP
Interest rate swaps
$
1,792
5,549
$
— $
—
1,792
5,549
$
— $ 1,364
— 10,638
$
— $
—
1,364
10,638
$
Liabilities:
Interest rate swaps
(3,726)
—
(3,726)
—
(799)
—
(799)
—
—
—
Financial Assets and Liabilities Not Measured at Fair Value
The following disclosures of estimated fair value were determined by management using available market information and
established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment.
The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial
instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value
88
amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to December 31,
2019 may differ significantly from the amounts presented.
Below is a summary of significant methodologies used in estimating fair values and a schedule of fair values at December 31,
2019.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents and restricted cash include cash and commercial paper with original maturities of less than 90 days,
which are valued at the carrying value, which approximates fair value due to the short maturity of these instruments (Level 1
inputs).
Debt
Mortgage notes payable consist of instruments in which certain of our real estate assets are used for collateral. We estimate the
fair value of the mortgage notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates
(with respect to the timing of each cash flow) plus credit spreads estimated through independent comparisons to real estate assets
or loans with similar characteristics. Line of credit payable consist of bank facilities which we use for various purposes including
working capital, acquisition funding and capital improvements. The line of credit advances and term loans with floating interest
rates are priced at a specified rate plus a spread. We estimate the market value based on a comparison of the spreads of the advances
to market given the adjustable base rate. We estimate the fair value of the notes payable by discounting the contractual cash flows
at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads derived using the
relevant securities’ market prices. We classify these fair value measurements as Level 3 as we use significant unobservable inputs
and management judgment due to the absence of quoted market prices.
As of December 31, 2019 and 2018, the carrying values and estimated fair values of our financial instruments were as follows (in
thousands):
Cash and cash equivalents
Restricted cash
Mortgage notes payable
Line of credit payable
Notes payable
December 31,
2019
2018
$
Carrying
Value
12,939
1,812
47,074
56,000
996,722
$
$
Fair Value
12,939
1,812
47,899
56,000
1,022,937
Carrying
Value
6,016
1,624
48,277
188,000
995,397
$
Fair Value
6,016
1,624
48,368
188,000
1,015,210
The mortgage note secured by Olney Village Center was reclassified to Other liabilities related to properties held for sale prior to
its prepayment during the third quarter of 2019 (see note 3). As of December 31, 2018, the carrying value and estimated fair value
of the mortgage note secured by Olney Village Center were $11.5 million and $12.0 million, respectively.
NOTE 10: STOCK BASED COMPENSATION
WashREIT maintains short-term and long-term incentive plans that allow for stock-based awards to officers and non-officer
employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real
Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share
units, options, and other awards up to an aggregate of 2,400,000 shares over the ten year period in which the plan will be in effect.
Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares. There were no
options issued or outstanding as of December 31, 2019 and 2018.
Short-Term Incentive Plan ("STIP")
Under the STIP, executive officers earn awards, payable 50% in cash and 50% in restricted shares, based on a percentage of salary
and an achievement rating subject to the discretion of the Compensation Committee of the board of trustees in consideration of
various performance conditions and other subjective factors during a one-year performance period. With respect to the 50% of
the STIP award payable in restricted shares, the restricted shares will vest over a three-year period commencing on the January 1
following the end of the one-year performance period. Prior to the adoption of the 2016 Omnibus Incentive Plan, stock based
89
awards to officers, non-officer employees and trustees were issued under the Washington Real Estate Investment Trust 2007
Omnibus Long-Term Incentive Plan which allowed for awards in the form of restricted shares, restricted share units, options and
other awards up to an aggregate of 2,000,000 shares while the plan was in effect.
The grant date for the 50% of the STIP award payable in restricted shares is the date on which the Compensation Committee
approves the STIP awards. We recognize compensation expense on this 50% when the grant date occurs at the end of the one-
year period through the three-year vesting period.
Bonuses payable under the short-term incentive plans for non-executive officers and staff are payable 100% in cash.
Long-Term Incentive Plan ("LTIP")
Under the LTIP, executive officers earn awards payable, 75% in unrestricted shares and 25% in restricted shares, based on a
percentage of salary and the achievement of certain market conditions. For performance periods beginning prior to January 1,
2018, LTIP performance was evaluated based 50% on absolute total shareholder return (“TSR”) and 50% on relative TSR over a
three-year evaluation period with a new three-year period initiating under the existing plan each year. During the first quarter of
2018, we amended the LTIP for executive officers to eliminate the absolute TSR component and only utilize relative TSR in the
measurement of market condition performance. Under the amended LTIP, relative TSR is evaluated 50% relative to a defined
population of peer companies and 50% relative to the FTSE NAREIT Diversified Index. The amendment became effective for
three-year performance periods commencing on or after January 1, 2018. The officers' total award opportunities under the LTIP
stated as a percentage of base salary ranges from 80% to 150% at target level. The unrestricted shares vest immediately at the end
of the three-year performance period, and the restricted shares vest over a one-year period commencing on the January 1 following
the end of the three-year performance period.
We recognize compensation expense ratably (over three years for the 75% unrestricted shares and over four years for the 25%
restricted shares) based on the grant date fair value, as determined using a Monte Carlo simulation, and regardless of whether the
market conditions are achieved and the awards ultimately vest.
We use a binomial model which employs the Monte Carlo method as of the grant date to determine the fair value of the officer
LTIP awards. For three-year performance periods commencing on or after January 1, 2018, the market condition performance
measurement is based on total shareholder return relative to a defined population of peer companies (50% weighting) and relative
to the FTSE NAREIT Diversified Index (50% weighting). The model evaluates the awards for changing total shareholder return
over the term of the vesting, relative to the peer companies and relative to the FTSE NAREIT Diversified Index, and uses random
simulations that are based on past stock characteristics as well as dividend growth and other factors for WashREIT and each of
the peer companies. For three-year performance periods commencing prior to January 1, 2018, the market condition performance
measurement was based on total shareholder return on an absolute basis (50% weighting) and relative to a defined population of
peer companies (50% weighting).
The assumptions used to value the officer LTIP awards were as follows:
2019 Awards
2018 Awards
2017 Awards
Expected volatility (1)
Risk-free interest rate (2)
Expected term (3)
Share price at grant date
(1) Expected volatility based upon historical volatility of our daily closing share price.
(2) Risk-free interest rate based on U.S. treasury constant maturity bonds on the measurement date with a maturity equal to the market condition performance
period.
(3) Expected term based on the market condition performance period.
$26.06
$23.00
$30.84 - $32.69
18.5% - 18.7%
3 and 4 years
3 and 4 years
3 and 4 years
18.1%
17.9%
1.5%
2.4%
2.4%
The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that
commenced in 2019 ranged from approximately 35% to 68% for the 50% of the LTIP based on TSR relative to a defined population
of peer companies and from 39% to 74% for the 50% of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index.
The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that
commenced in 2018 ranged from approximately 31% to 60% for the 50% of the LTIP based on TSR relative to a defined population
of peer companies and from 35% to 68% for the 50% of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index.
90
The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that
commenced in 2017 ranged from approximately 37% to 67% for the 50% of the LTIP based on relative TSR and from 13% to
31% for the 50% of the LTIP based on absolute TSR.
During 2017, our chief executive officer was granted a one-time equity award of 100,000 restricted shares. None of the restricted
shares vest until the fifth anniversary of the grant date, at which time 100% of the restricted shares will vest, subject to Mr.
McDermott's continued employment with WashREIT until such vesting date.
Our non-executive officers and other employees earn restricted share unit awards under a long-term incentive plan for non-executive
officers and staff based upon various percentages of their salaries and annual performance calculations. The restricted share unit
awards vest ratably over three years from December 15 preceding the grant date based upon continued employment. We recognize
compensation expense for these awards according to a graded vesting schedule over the three-year requisite service period.
During the first quarter of 2019, we amended the STIP for executive officers and the STIP and LTIP for non-executive officers
and staff to replace the use of core funds available for distribution as a performance metric and performance goal, respectively,
with a Leasing Target performance metric and performance goal. Leasing Target means the aggregate annual leasing target amount
(measured in square feet of leasing space) as approved by the compensation committee of our board of trustees for a given
performance period and performance year, respectively, with regards to our office and retail properties. The amendments became
effective as of March 18, 2019 for performance periods beginning on or after January 1, 2019.
Restricted share awards made to retirement-eligible employees fully vest on the grant date. Employees are considered retirement-
eligible when they are both over the age of 55 and have been employed by WashREIT for at least 20 years, or over the age of 65.
We fully recognize compensation expense for such awards as of the grant date.
Trustee Awards
We award share based compensation to our trustees in the form of restricted shares which vest immediately and are restricted from
sale for the period of the trustees' service. The value of share-based compensation for each trustee was $100,000 for each of three
years ended December 31, 2019.
Total Compensation Expense
Total compensation expense recognized in the consolidated financial statements for each of the three years ended December 31,
2019 for all share based awards was $7.7 million, $6.7 million and $4.8 million, respectively, net of capitalized stock-based
compensation expense of $0.2 million, $0.3 million and $0.2 million, respectively.
91
Restricted Share Awards with Performance and Service Conditions
The activity for the three years ended December 31, 2019 related to our restricted share awards, excluding those subject to market
conditions, was as follows:
Unvested at December 31, 2016
Granted
Vested during year
Forfeited
Unvested at December 31, 2017
Granted
Vested during year
Forfeited
Unvested at December 31, 2018
Granted
Vested during year
Forfeited
Unvested at December 31, 2019
Shares
Wtd Avg Grant Fair
Value
107,699
$
330,639
(194,569)
(7,075)
236,694
304,087
(224,150)
(5,621)
311,010
213,782
(236,013)
(19,396)
269,383
26.47
32.46
30.50
27.43
27.96
25.98
27.40
29.43
29.07
26.26
27.43
26.60
28.45
The total fair value of share grants vested for each of the three years ended December 31, 2019 was $6.5 million, $6.1 million and
$5.9 million, respectively.
As of December 31, 2019, the total compensation cost related to non-vested share awards not yet recognized was $5.9 million,
which we expect to recognize over a weighted average period of 22 months.
Restricted and Unrestricted Shares with Market Conditions
Stock based awards with market conditions under the LTIP were granted in 2019, 2018 and 2017 with fair market values, as
determined using a Monte Carlo simulation, as follows (in thousands):
2019 Awards
Grant Date Fair Value
2018 Awards
2017 Awards
Restricted
Unrestricted
Restricted
Unrestricted
Restricted
Unrestricted
Relative Peer TSR
Absolute/Index TSR (1)
$
$
184
201
$
552
602
$
203
230
$
608
690
$
222
100
666
299
The unamortized value of these awards with market conditions as of December 31, 2019 was as follows (in thousands):
2019 Awards
2018 Awards
2017 Awards
Restricted
Unrestricted
Restricted
Unrestricted
Restricted
Unrestricted
$
138
151
$
368
401
$
85
96
$
171
194
$
44
20
—
—
$
Relative Peer TSR
Absolute/Index TSR (1)
______________________________
(1)
The performance conditions for the 2019 and 2018 awards were evaluated based on 50% on TSR relative to a defined population of peer companies and
50% on TSR relative to the FTSE NAREIT Diversified Index. The performance condition for the 2017 awards was evaluated based 50% on absolute TSR
and 50% on relative TSR.
NOTE 11: OTHER BENEFIT PLANS
We have a Retirement Savings Plan (the “401(k) Plan”), which permits all eligible employees to defer a portion of their compensation
in accordance with the Code. Under the 401(k) Plan, we may make discretionary contributions on behalf of eligible employees.
For each of the three years ended December 31, 2019, we made contributions to the 401(k) plan of $0.5 million, $0.5 million and
$0.4 million, respectively.
92
We have adopted non-qualified deferred compensation plans for the officers and members of the board of trustees. The plans allow
for a deferral of a percentage of annual cash compensation and trustee fees. The plans are unfunded and payments are to be made
out of the general assets of WashREIT. The deferred compensation liability was $0.9 million and $1.1 million at December 31,
2019 and 2018, respectively.
In November 2005, the board of trustees approved the establishment of a SERP for the benefit of officers. This is a defined
contribution plan under which, upon a participant's termination of employment from WashREIT for any reason other than discharge
for cause, the participant will be entitled to receive a benefit equal to the participant's accrued benefit times the participant's vested
interest. We account for this plan in accordance with ASC 710-10 and ASC 320-10, whereby the investments are reported at fair
value, and unrealized holding gains and losses are included in earnings. At December 31, 2019 and 2018, the accrued benefit
liability was $1.8 million and $1.4 million, respectively. For each of the three years ended December 31, 2019, we recognized
current service cost of $0.2 million, $0.3 million and $0.3 million, respectively.
NOTE 12: EARNINGS PER COMMON SHARE
We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-
forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by
dividing net income attributable to the controlling interest less the allocation of undistributed earnings to unvested restricted share
awards and units by the weighted-average number of common shares outstanding for the period.
We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with
respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period
and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per
share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based
awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method.
93
The computation of basic and diluted earnings per share for the three years ended December 31, 2019 was as follows (in thousands;
except per share data):
Numerator:
Income (loss) from continuing operations
Net loss attributable to noncontrolling interests
Allocation of losses (earnings) from continuing operations to unvested
restricted share awards
Adjusted income (loss) from continuing operations attributable to the
controlling interests
Income from discontinued operations, including gain on sale of real estate
Net loss attributable to noncontrolling interests
Allocation of earnings from discontinued operations to unvested
restricted share awards
Adjusted income from discontinued operations
Year Ended December 31,
2019
2018
2017
$
29,132
$
1,153
$
—
—
(3,568)
56
(125)
(526)
(362)
29,007
354,418
—
(1,837)
352,581
627
24,477
—
—
24,477
(3,874)
23,180
—
—
23,180
19,306
Adjusted net income attributable to the controlling interests
$
381,588
$
25,104
$
Denominator:
Weighted average shares outstanding – basic
Effect of dilutive securities:
Operating partnership units
Employee restricted share awards
Weighted average shares outstanding – diluted
Earnings per common share, basic:
Continuing operations
Discontinued operations
Basic net income attributable to the controlling interests per common share
Earnings per common share, diluted:
Continuing operations
Discontinued operations
Diluted net income attributable to the controlling interests per common share
Dividends declared per common share
NOTE 13: COMMITMENTS AND CONTINGENCIES
Development Commitments
80,257
78,960
76,820
12
66
12
70
—
—
80,335
79,042
76,820
$
$
$
$
$
0.36
4.39
4.75
0.36
4.39
4.75
1.20
$
$
$
$
$
0.01
0.31
0.32
0.01
0.31
0.32
1.20
$
$
$
$
$
(0.05)
0.30
0.25
(0.05)
0.30
0.25
1.20
At December 31, 2019, we had no committed contracts outstanding with third parties in connection with our development and
redevelopment projects.
Litigation
We are involved from time to time in various legal proceedings, lawsuits, examinations by various tax authorities and claims that
have arisen in the ordinary course of business. Management believes that the resolution of any such current matters will not have
a material adverse effect on our financial condition or results of operations.
94
NOTE 14: SEGMENT INFORMATION
We evaluate real estate performance and allocate resources by property type and have two reportable segments: office and
multifamily. Office properties provide office space for various types of businesses and professions. Multifamily properties provide
rental housing for individuals and families throughout the Washington metro region. We previously had a retail segment consisting
of grocery store-anchored neighborhood centers that include other small shop tenants and regional power centers with several
junior box tenants. During 2019, we executed the sales of eight retail properties (see note 3). These properties met the criteria for
classification as held for sale as of June 30, 2019 and are classified as discontinued operations. This strategic shift simplified our
portfolio to two reportable segments (office and multifamily) and reduced our exposure to future retail lease expirations. The
remaining retail properties do not meet the qualitative or quantitative criteria for a reportable segment, and are classified within
“Corporate and other” on our segment disclosure tables. The dispositions of the eight retail properties are part of a strategic shift
away from the retail sector.
Real estate rental revenue as a percentage of the total for each of the reportable operating segments for the three years ended
December 31, 2019 was as follows:
Multifamily
Office
Corporate and other
Year Ended December 31,
2019
2018
2017
41%
53%
6%
33%
61%
6%
34%
60%
6%
The percentage of income producing real estate assets classified as held and used, at cost, for each of the reportable operating
segments as of December 31, 2019 and 2018 was as follows:
Multifamily
Office
Corporate and other
December 31,
2019
2018
50%
45%
5%
36%
58%
6%
The accounting policies of each of the segments are the same as those described in note 2.
We evaluate performance based upon net operating income from the combined properties in each segment. Our reportable operating
segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the
chief operating decision maker for purposes of assessing segments’ performance. Net operating income is a key measurement of
our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses.
95
The following tables present revenues, net operating income, capital expenditures and total assets for the three years ended
December 31, 2019 from these segments, and reconciles net operating income of reportable segments to net income attributable
to the controlling interests as reported (in thousands):
Year Ended December 31, 2019
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
General and administrative
Lease origination expenses
Interest expense
Real estate impairment
Gain on sale of real estate
Discontinued operations:
Income from properties sold or held for sale
Gain on sale of real estate
Loss on extinguishment of debt
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
General and administrative
Real estate impairment
Interest expense
Gain on sale of real estate
Loss on extinguishment of debt
Discontinued operations:
Income from properties sold or held for sale
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
Office
$ 164,059
60,923
$ 103,136
Multifamily
$ 126,131
49,135
76,996
$
$
18,990
5,522
13,468
Corporate
and Other (1) Consolidated
$ 309,180
$
115,580
$ 193,600
(136,253)
(24,370)
(1,698)
(53,734)
(8,374)
59,961
16,158
339,024
(764)
383,550
—
$ 383,550
$
68,947
$ 2,628,328
$
38,634
$1,134,147
$
25,779
$1,340,634
$
4,534
$ 153,547
Year Ended December 31, 2018
Office
Multifamily
Corporate
and Other (1) Consolidated
$ 178,474
63,321
$ 115,153
$
$
95,194
37,235
57,959
$
$
5,036
13,026
18,062
$ 291,730
105,592
$ 186,138
(111,826)
(22,089)
(1,886)
(50,501)
2,495
(1,178)
24,477
25,630
—
25,630
72,033
$
$
$
42,019
$
25,117
$
4,897
$1,248,673
$ 792,170
$ 376,261
$ 2,417,104
96
Real estate rental revenue
Real estate expenses
Net operating income
Depreciation and amortization
General and administrative
Casualty gain
Interest expense
Other income
Gain on sale of real estate
Income tax benefit
Discontinued operations:
Income from properties sold or held for sale
Net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to the controlling interests
Capital expenditures
Total assets
Year Ended December 31, 2017
Office
$ 167,438
62,824
$ 104,614
Multifamily
95,250
$
37,640
57,610
$
$
17,593
4,936
12,657
Corporate
and Other (1) Consolidated
$ 280,281
$
105,400
$ 174,881
(101,430)
(22,580)
(33,152)
(46,793)
507
24,915
84
23,180
19,612
56
19,668
$
$
64,381
$ 2,359,426
$
30,407
$1,203,187
$
27,980
$ 767,279
$
5,994
$ 388,960
______________________________
(1)
Includes the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S.
Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village, and total assets and capital expenditures include all
retail properties, including those classified as discontinued operations.
97
NOTE 15: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited financial data by quarter in each of the years ended December 31, 2019 and 2018 were as follows (in thousands, except
for per share data):
2019
Real estate rental revenue
(Loss) income from continuing operations
Net (loss) income
Net (loss) income attributable to the controlling interests
(Loss) income from continuing operations per share
Basic
Diluted
Net income per share
Basic
Diluted
2018
Real estate rental revenue
(Loss) income from continuing operations
Net income
Net income attributable to the controlling interests
Income (loss) from continuing operations per share
Basic
Diluted
Net income per share
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Quarter
(1), (2)
First
Second
Third
Fourth
71,434
$
(10,443) $
(4,405) $
(4,405) $
76,820
$
(6,191) $
$
987
80,259
$
(8,432) $
$
332,770
987
$
332,770
$
80,667
54,198
54,198
54,198
(0.13) $
(0.13) $
(0.08) $
(0.08) $
(0.10) $
(0.10) $
(0.06) $
(0.06) $
0.01
0.01
$
73,645
(2,559) $
3,299
3,299
$
$
75,344
4,563
10,750
10,750
(0.03) $
(0.03) $
0.04
0.04
$
$
0.06
0.06
0.14
0.13
$
$
$
$
$
$
$
$
$
$
4.14
4.14
$
$
71,001
$
(547) $
$
5,893
5,893
$
(0.01) $
(0.01) $
0.07
0.07
$
$
0.66
0.66
0.66
0.66
71,740
(304)
5,688
5,688
—
—
0.07
0.07
______________________________
(1)
(2)
With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding.
The second quarter of 2019 includes a loss on sale of real estate of $1.0 million. The third and fourth quarters of 2019 include gains on sale of real estate
of $339.0 million and $61.0 million, respectively. The second quarter of 2018 includes a gain on sale of real estate of $2.5 million. The first quarter of 2019
and first quarter of 2018 include real estate impairments of $8.4 million and $1.9 million, respectively.
98
NOTE 16: SHAREHOLDERS' EQUITY
On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “2018 Equity Distribution
Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup
Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and SunTrust
Robinson Humphrey, Inc. relating to the issuance of up to $250.0 million of our common shares from time to time under our at-
the-market program. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use
net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation,
working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing
properties or the repayment of debt. Our issuances and net proceeds on the 2018 Equity Distribution Agreements for the years
ended December 31, 2019 and 2018 were as follows (in thousands; except per share data):
Issuance of common shares
Weighted average price per share
Net proceeds
Year Ended December 31,
2019
2018
1,859
30.00
54,916
$
$
1,165
31.18
35,472
$
$
The 2018 Equity Distribution Agreements replaced our previous equity distribution agreements with Wells Fargo Securities, LLC,
BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc. and RBC Capital Markets LLC, dated June 23, 2015. We did
not issue any common shares on the previous equity distribution agreements during 2018. For the year ended December 31, 2017,
we issued 3.6 million common shares at a weighted average price per share of $32.06 for net proceeds of $113.2 million on the
previous equity distribution agreements.
We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase
common shares. The common shares sold under this program may either be common shares issued by us or common shares
purchased in the open market. Net proceeds under this program are used for general corporate purposes.
Our issuances and net proceeds on the dividend reinvestment program for the three years ended December 31, 2019 were as follows
(in thousands; except per share data):
Issuance of common shares
Weighted average price per share
Net proceeds
NOTE 17: DEFERRED COSTS
Year Ended December 31,
2019
2018
2017
$
$
173
27.58
4,755
$
$
81
29.18
1,973
$
$
80
32.25
2,576
As of December 31, 2019 and 2018, deferred leasing costs and deferred leasing incentives were included in prepaid expenses and
other assets as follows (in thousands):
2019
2018
December 31,
Deferred leasing costs
Deferred leasing incentives
Gross Carrying
Value
Accumulated
Amortization
Net
Gross Carrying
Value
Accumulated
Amortization
$
60,900
$
29,580
$
31,320
$
63,659
$
31,438
$
18,926
11,133
7,793
22,801
12,311
Net
32,221
10,490
Amortization, including write-offs, of deferred leasing costs and deferred leasing incentives for the three years ended December 31,
2019 were as follows (in thousands):
99
Deferred leasing costs amortization
Deferred leasing incentives amortization
Year Ended December 31,
2019
2018
2017
$
$
6,599
2,862
$
5,881
2,811
5,784
3,009
100
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(IN THOUSANDS)
Balance at
Beginning of Year
Additions Charged
to Expenses
Net Recoveries
Balance at End of
Year
Valuation allowance for deferred tax assets
2019
2018
2017
$
$
$
1,419
1,413
2,882
$
$
$
— $
6
$
— $
(17) $
— $
(1,469) $
1,402
1,419
1,413
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W
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
SUMMARY OF REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
The following is a reconciliation of real estate assets and accumulated depreciation for the three years ended December 31, 2019
(in thousands):
Real estate assets
Balance, beginning of period
Additions:
Property acquisitions (1)
Improvements (1)
Deductions:
Impairment write-down
Write-off of disposed assets
Property sales
Balance, end of period
Accumulated depreciation
Balance, beginning of period
Additions:
Depreciation
Deductions:
Impairment write-down
Write-off of disposed assets
Property sales
Balance, end of period
______________________________
(1)
Includes non-cash accruals for capital items.
Year Ended December 31,
2019
2018
2017
$
2,973,816
$
2,831,683
$
2,725,635
516,054
140,109
(24,432)
(7,430)
(438,654)
3,159,463
770,535
107,938
(16,058)
(2,173)
(147,612)
712,630
$
$
$
220,495
103,404
(2,177)
(2,132)
(177,457)
2,973,816
690,417
98,141
(291)
(1,859)
(15,873)
770,535
$
$
$
124,306
84,560
(81,982)
(2,655)
(18,181)
2,831,683
657,425
94,558
(48,830)
(1,708)
(11,028)
690,417
$
$
$
104
I, Paul T. McDermott, certify that:
CERTIFICATION
Exhibit 31.1
1.
I have reviewed this annual report on Form 10-K of Washington Real Estate Investment Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
DATE: February 18, 2020
/s/ Paul T. McDermott
Paul T. McDermott
Chief Executive Officer
I, Stephen E. Riffee, certify that:
CERTIFICATION
Exhibit 31.2
1.
I have reviewed this annual report on Form 10-K of Washington Real Estate Investment Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
DATE: February 18, 2020
/s/ Stephen E. Riffee
Stephen E. Riffee
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
Exhibit 31.3
I, W. Drew Hammond, certify that:
1.
I have reviewed this annual report on Form 10-K of Washington Real Estate Investment Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
DATE: February 18, 2020
/s/ W. Drew Hammond
W. Drew Hammond
Chief Accounting Officer
(Principal Accounting Officer)
WRITTEN STATEMENT OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
The undersigned, the President and Chief Executive Officer, Chief Financial Officer, and the Vice President - Chief
Accounting Officer and Controller of Washington Real Estate Investment Trust (“Washington REIT”), each hereby certifies on
the date hereof, that:
(a) the Annual Report on Form 10-K for the year ended December 31, 2019 filed on the date hereof with the Securities and
Exchange Commission (the “Report”) fully complies with the requirements of Section 13 (a) or 15(d) of the Securities
Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Washington REIT.
Dated: February 18, 2020
/s/ Paul T. McDermott
Paul T. McDermott
Chief Executive Officer
Dated: February 18, 2020
/s/ Stephen E. Riffee
Stephen E. Riffee
Chief Financial Officer
(Principal Financial Officer)
Dated: February 18, 2020
/s/ W. Drew Hammond
W. Drew Hammond
Chief Accounting Officer
(Principal Accounting Officer)
Executive Officers
Paul T. McDermott
President & Chief Executive Officer
Stephen E. Riffee
Executive Vice President
and Chief Financial Officer
Taryn D. Fielder
Senior Vice President,
General Counsel and Corporate Secretary
Trustees
Paul T. McDermott
Chairman of the Board &
Chief Executive Officer
Ellen M. Goitia
Retired Partner,
KPMG LLP
Benjamin S. Butcher
Chief Executive Officer,
President & Chairman of the Board,
STAG Industrial, Inc.
Thomas H. Nolan, Jr.
Former Chairman of the Board
& Chief Executive Officer,
Spirit Realty Capital Inc.
William G. Byrnes
Retired Managing Director,
Alex Brown & Sons
Edward S. Civera
Retired Chairman of the Board,
Catalyst Health Solutions, Inc.
Vice Admiral Anthony L. Winns (USN, Ret.)
President, Latin America-Africa Region,
Lockheed Martin Corporation
Corporate Information
Corporate Headquarters
WashREIT
1775 Eye Street, NW, Suite 1000
Washington, DC 20006
202.774.3200
800.565.9748
www.washreit.com
Investor Relations
WashREIT
Amy Hopkins
Vice President, Investor Relations
202.774.3200
Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Independent Registered
Public Accounting Firm
Ernst & Young LLP
1775 Tysons Blvd
Tysons, Virginia 22102
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, Texas 77845-3170
Annual Meeting
WashREIT will hold its annual meeting on
May 28, 2020, at 8:30 a.m.
WashREIT Direct
WashREIT’s dividend reinvestment plan permits
cash investment of up to the amount specified in the
plan, plus dividend, and is IRA eligible.
Stock Information
WashREIT is traded on the New York Stock Exchange.
The trading symbol is WRE.
Member
National Association of Real Estate Investment Trusts®
1875 Eye Street, NW, Suite 600
Washington, DC 20006-5413
Annual CEO Certification
WashREIT submitted the CEO Certification
required by the NYSE under Section 303A.
12(a) without qualifications.
1775 Eye Street, NW, Suite 1000, Washington, DC 20006
www.washreit.com